Month: November 2011

New Berlin Wall V: The IRS attack on U.S. expats will become a diplomatic issue (guest post)

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The following guest post from Renounce US Citizenship adds to our series on the New Berlin wall.

The IRS attack on U.S. expats will become a diplomatic issue

The conventional wisdom is that taxes are a domestic matter and that the U.S. State Department should not get involved in the vicious assault levied on American citizens living abroad. The conventional wisdom is wrong. The conduct of the IRS is becoming and will become more and more of a diplomatic issue for the U.S. There are two broad categories of reasons. The first pertains to the role that U.S. citizens play as ambassadors for the U.S.A. The second has to do with friction with foreign governments.

U.S. Expats As Ambassadors for the U.S.A.

  1. Everybody agrees that there have been a large percentage of U.S. citizens living abroad who didn’t know they were required to file a U.S. tax return.
  2. Of those who did know that they had to file a tax return, only a small percentage of them knew about the FBAR reporting requirements.
  3. Recent events have caused U.S. citizens living abroad to cower in fear that their savings and property will be confiscated. Whether true or not, that is the perception.
  4. The reaction of U.S. citizens abroad is anger and a feeling of betrayal. They have done nothing wrong. The most that could be said is they failed to comply with a requirement (of questionable moral validity) that they did not know about and had no reason to believe existed. (Many accountants and lawyers are just getting up to speed on this). Not only are many U.S. expats getting ready to renounce U.S. citizenship, but they are now extremely hostile to the U.S. Furthermore, many U.S. expats now understand (having been subjected to the arbitrariness, capriciousness, recklessness and irresponsibility of the U.S.) why the U.S. is so disliked throughout the world.
  5. These expats are now part of the world that dislikes the U.S. But there is more. Expats were (in most cases) the most loyal of American flag wavers. No more. They are now the strongest and most articulate U.S. bashers. This is not something the U.S. can afford. Imagine five million U.S. citizens who make “America Bashing” an obsession.  It’s like this: You steal a person’s health, wealth and life and that is what you are going to get. Just imagine who much damage this will do to the U.S. over a long period of time. Five million U.S. expats outside the U.S. expressing their disgust with the U.S.
  6.  The U.S. cannot afford to have five million U.S. citizens trying to renounce their citizenship and telling everybody they know why. The U.S. and Eritrea (a terrorist state) are the only two countries that tax on the basis of citizenship.
  7. In case you didn’t understand this from points 5 and 6, I will make it clearer. The U.S.  government has turned U.S. expats against the U.S.

Friction With Foreign Governments

FATCA, the U.S. Berlin Wall and the neutron bomb of the financial system, will guarantee that foreign banks and countries will do their best and will learn how to avoid the U.S. financial system. Over the long run other countries do NOT have to “play in the sandbox” with the U.S. Of course, if they don’t want to play with the U.S., this will make it difficult for the U.S. dollar to maintain its status as the world reserve currency.

Leaving aside FATCA, the current assault on U.S. expats is going to be a problem for foreign governments of which the Canadian government is one example. The Canadian Finance Minister has made it clear how the Canadian Government views this unprincipled, immoral, vicious assault on Canadian citizens. If the IRS steals the retirement savings of Canadian citizens, this will become a long term burden on the Government of Canada. To put it another way: the IRS is stealing from the Government of Canada.

Bottom Line: In the short run, the current IRS assault on U.S. expats is an IRS tax issue. In the long run (and it won’t be too long), it is going to become a major diplomatic problem for the U.S. There is still time to change course, but the time is running out. The U.S. really can’t afford any more enemies. Hilary Clinton take note!

 

(used with permission).

FATCA: A Ticking Time Bomb for the Economy

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The following article appeared in the American Thinker this morning:

FATCA: A Ticking Time Bomb for the Economy

Peter W. Dunn

Buried in an ostensible jobs bill signed by President Obama last year is a little-noticed job-destroying government regulation that threatens to trigger a massive outflow of capital from the American economy.

The US economy is in bad shape.  Many want the federal government to fix it — to end the deficits, create jobs and get America back onto the track of growth and stability.  President Obama came to Washington with great promises: to restore international respect for the United States and to bring back the jobs.  When signing the HIRE Act of 2010 on March 18, 2010, President Obama said:

A consensus is forming that, partly because of the necessary — and often unpopular — measures we took over the past year, our economy is now growing again and we may soon be adding jobs instead of losing them. The jobs bill I’m signing today is intended to help accelerate that process.

Now the HIRE Act of 2010 contains a time bomb called FATCA (Foreign Account Tax Compliance Act), which has indeed accelerated a process. Unfortunately that process is not job generation but job destruction caused by an exodus of capital from the United States.  Investment means jobs; a departure of investment capital means job losses.  Thus, the HIRE Act is really the “FIRE Act”.

The Background of FATCA and FBAR

FATCA (Foreign Account Tax Compliance Act) is the brood of FBAR (Foreign Bank Account Report).  FBAR requires that US persons divulge foreign accounts to the Treasury Department, but few knew about or ever complied with it (see When Government turns Predator).  To stanch the bleeding of US capital into secret bank jurisdictions like the Cayman Islands and Switzerland, Congress introduced FATCA into law as part of the HIRE Act.  FATCA requires that Foreign Financial Institutions (FFIs) reveal the accounts of US persons to the IRS.  The FFIs will then have to collect tax withholdings for the IRS from these clients.  If by January 1, 2014 the FFI is unwilling to reveal their US clients’ accounts, the IRS will impose a punitive 30% withholding on all payments to the FFIs, on dividends, interest and gross sales of stocks, bonds, and financial derivatives.

A sample transaction

Let’s suppose a foreign investor trades stocks on a US exchange, but his broker is FATCA non-compliant.  One day he buys 10,000 shares of XYZ at $25 per share, and the next day, he takes advantage of a nice uptick of $1.00 in XYZ and sells at $26 per share.  He makes a tidy profit of $10,000.  But because his broker is non-compliant, the IRS now withholds 30%, not of the profit but of the gross proceeds of the sale!  So the client now receives the sum of $260,000 minus 30%.  The foreign investor is unhappy because his $250,000 investment has become $182,000.  If he wants his money back, he must file a US tax return.

No investor would accept such conditions.  Hence, an FFI must either comply with the invasive regulations of FATCA or simply abandon the US markets.

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FATCA will violate the Ontario Human Rights Code

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This morning has appeared my article on FATCA at the American Thinker:  FATCA: A Ticking Time Bomb for the Economy, which I will be posting here later as well.  Thanks American Thinker for publishing this and thanks for helping us sensitize readers about what we US expats are going through.

There is now quite another reason to think that FFIs cannot implement FATCA:  It is a violation of the Human Rights Code.  Renounceuscitizenship reminded me of this particular legal argument.  I had commented the following:

The Canadian government has to do something. You can’t simply allow another country to come in and pick your citizens’ and residents’ pockets. It is a theft and a threat to Canadian sovereignty. It is a casus belli.

But furthermore, if the US were to go and occupy Canada and force its citizens to pay tribute, that would be one thing. That would be a consequence of losing a war to a hostile country. But I thought that the US and Canada are allies. You don’t treat your friends this way, only your conquered foes. Obama is a disgrace. I am utterly disgusted by this government.

Renounceuscitizenship responded:

Agreed. In addition, there is the issue of FATCA and the Canadian banks. The Canadian banks should take a principled stand and not comply with FATCA. Compliance with FATCA is completely optional. If the Canadian banks comply it is because they have made a decision that profits are more important than principles – unless of course the only principle is profit.

To turn over client information to the IRS based on citizenship is arguably a violation of Canadian (Federal and provincial human rights legislation). The Ontario Human Rights codes prohibits discrimination based on citizenship.

Here is what the Ontario Human Rights Code reads in relation to discrimination in relation to services:

http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90h19_e.htm

Preamble

Whereas recognition of the inherent dignity and the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world and is in accord with the Universal Declaration of Human Rights as proclaimed by the United Nations;

And Whereas it is public policy in Ontario to recognize the dignity and worth of every person and to provide for equal rights and opportunities without discrimination that is contrary to law, and having as its aim the creation of a climate of understanding and mutual respect for the dignity and worth of each person so that each person feels a part of the community and able to contribute fully to the development and well-being of the community and the Province;

And Whereas these principles have been confirmed in Ontario by a number of enactments of the Legislature and it is desirable to revise and extend the protection of human rights in Ontario;

Therefore, Her Majesty, by and with the advice and consent of the Legislative Assembly of the Province of Ontario, enacts as follows:

PART I
FREEDOM FROM DISCRIMINATION

Services

1. Every person has a right to equal treatment with respect to services, goods and facilities, without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, family status or disability. R.S.O. 1990, c. H.19, s. 1; 1999, c. 6, s. 28 (1); 2001, c. 32, s. 27 (1); 2005, c. 5, s. 32 (1).

Obviously a competent lawyer is required to frame the arguments, but I would expect any Canadian bank that starts reporting information to the IRS based on the citizenship of an individual, would and should be hauled in front of the Human Rights Commission to seek a remedy. What remedy? This seems to be in S. 46

Civil remedy

46.1 (1) If, in a civil proceeding in a court, the court finds that a party to the proceeding has infringed a right under Part I of another party to the proceeding, the court may make either of the following orders, or both:

1. An order directing the party who infringed the right to pay monetary compensation to the party whose right was infringed for loss arising out of the infringement, including compensation for injury to dignity, feelings and self-respect.

2. An order directing the party who infringed the right to make restitution to the party whose right was infringed, other than through monetary compensation, for loss arising out of the infringement, including restitution for injury to dignity, feelings and self-respect. 2006, c. 30, s. 8.

The banks will have to choose between obeying a U.S. law (and kowtowing to the IRS) or obeying the law of Ontario. They are caught between a rock and a hard place. Surely, it should be made more expensive for the banks to violate the rights of Canadians than to disobey an attempt to by the U.S. government to extend its law into other countries.

Yes, I agree that it is time for the Government of Canada to get involved and put its foot down. The fact is that: nothing less than Canadian sovereignty is at stake here!

Others have made this argument at the Canadian Expat Forum, but I hadn’t actually seen the wording of the Ontario Human Rights Code, which would clearly forbid banks from discriminating against clients because they are citizens of the US, as FATCA requires.  Indeed, Canadian banks will have to choose between the laws of Ontario (and Canada) or the laws of the United States.

Focus on what is real not what is reified

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Kevin Graham, who was recently featured at the Globe & Mail, continues to write about DIY investing at his blog.  Recently, he wrote against oil investing, “Five reasons that oil prices will fail“.   While I agree with some of what he says, I am the sort of investor that he would criticize (and he has done so on this blog).  All of my investments are in oil & gas companies or gold and gold mining companies.  But I am not sure what else to do in the current investment environment.

So I wrote a comment (edited below), that I had the hardest time swallowing this one line from Graham:

“Commodity prices do not reflect reality.”

I don’t disagree that commodities could be in a bubble per se–that could be the case, and the recent rise in the oil price might see a pull back. Rather, I am bemused because it assumes that our current financial markets have anything at all to do with reality. You and I are in fundamental disagreement about fiat currency. Considering that fiat currency is a derivative and has no intrinsic value, it is curious that you could determine value of a commodity based on its nominal dollar value. This is what philosophers call reification. You are trying to determine the value of a concrete object (a commodity) on the basis of an abstraction (the value of the dollar).

In this light, Jim Grant told the story of a letter to the editor of the Financial Times, in which the author said that he finally understands what Quantitative easing is, but now he isn’t clear on what money is anymore.

Commodities are real. Money is not. When high/hyperinflation hits, I will be focussing on what is real, as fiat money will no longer represent anything of value. That is to say, my spam collection, my hoard of wine kits, and my unused toilet paper have intrinsic value, but the dollar, not so much. Commodity prices do not reflect reality, because money itself is not real. When money is debased, it is better to have something that is real than a derivative of a symbol of the collective worth of an insolvent nation.

Guest post: The IRS–Your health, your wealth and your life

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The IRS: Your health, your wealth and your life

by RenounceUScitizenship (used with permission)

The IRS has had a huge impact on your health, your wealth your life.

Your Life

I  came across a news article that started as follows (Vancouver Observer):

Several weeks ago, my brother sent me an article from the Financial Post — and my life changed in an instant.

My brother and I were born in the United States, but we left as teens. I have lived and worked in Canada for close to the last four decades, as a proud Canadian citizen.

The article talked about the fact that the U.S. is the only country in the world that taxes its citizens who are neither living in the U.S. nor working there. Even if American ex-pats are not earning an income there, the U.S. government is still able to tax them.

But it gets worse –- in its supreme arrogance, because our neighbor to the south is broke and in considerable debt, it is now bullying folks like me, by laying down the law saying that all of its citizens must pay U.S. taxes, regardless of the circumstances. And if any non-resident citizens choose to be ‘non-compliant’ and not file up to several years of back taxes, they could be punished by facing stiff fines of up to 25% of their entire financial worth, and maybe even go to jail. The jackbooted tone of the warning was clear. The IRS meant to scare –- and it worked.

There are many U.S. expats who are still not aware of FBAR, FATCA, OVDI, and the like. Those who became aware of these things are unlikely to forget the day, the moment, where you were and how you learned of it. From the moment that you learned of these things, your life was irreparably changed. The vast majority of U.S. expats were and are law abiding citizens.

Furthermore, it is likely in terms of their self  images that they:

–        Thought of themselves as law abiding, honest people

–        Had done their best to be tax compliant and law abiding

–        Were loyal patriotic Americans

–        Were and are fair minded people who could not conceive that the U.S. government could behave in such an immoral and “irresponsible and unreasonable” way (Apologies to Ambassador Jacobson)

From the moment they became aware of this IRS nightmare, it is likely that they:

–        Felt frozen, scared and confused (like a deer in the headlights)

–        Felt a strong sense of having been betrayed

–        Were unable to obtain any consistent, reasonable and clear advice about what to do

–        May have been pressured to enter OVDI

–        Did not have the money to pay the legal and accounting fees to even begin compliance

–        Would never have had the money to pay any penalties

–         Find it hard to believe that they are being treated as though they are criminals

 After the dust had begun to settle, on  the “Economic Front” it is  likely that may U.S. expats  realized that:

–        “U.S. citizenship was a problem to be solved” (to use the words of Phil Hodgen) and that the only way to solve it, was to renounce.

–        Barrie McKenna of the Globe and Mail likened the rift to “divorce”

–        U.S. citizenship presents a clear and present danger to the financial health of you and your family

Your Health – From the perspective of their emotional and physical health, there is no doubt:

–        The “jackboot” behavior of the IRS has severely damaged the physical health of many U.S. expats. After all, how much stress and worry can a law abiding citizen take?

–        The sense  of betrayal, unreasonableness, and unfairness  has created tremendous emotional and psychological problems for those affected by this. The shock of 2011 has been severe – it is likely that many U.S. expats will need psychological counseling if they are ever to recover. This is another aspect of the “collateral” damage associated with all of this.

My unprofessional but (I hope practical advice):

1.  This is not YOUR FAULT – you have done nothing wrong. Even if you are violation of the FBAR law, you have done nothing wrong in a moral sense. As you now know, there is no relationship between law and morality.

2. You are shocked to find that the U.S. is not the country that you thought it was. You believed that the U.S. was that “great citadel of freedom and justice”. ‘That’s what the country was – that is how you remember it. You are finding it hard to believe that you were wrong. You feel that you were deceived, conned, lied to, misled. That’s partially true. The reality is that the U.S. is no longer the country that it was. The U.S. under the Obama administration is nothing more than a vicious, debt ridden thug. The U.S. has evolved from being a nation of laws to a nation of forms.

3. If you are a U.S. patriot you feel betrayed – you feel that your patriotism is being tested. A  U.S. patriot has allegiance to the ideals and constitution of the United States of America. This is different from an allegiance to the U.S. government of the day. If the government does not respect the constitution, then the most patriotic thing you could do may to renounce your U.S. citizenship.

4. Although your first instinct may to run and hide – you do need to deal with this situation.  The problem is that you don’t know how to deal with it – you can’t find consistent, reliable advice. You are required by law to file a tax return, and FBAR and the new (for 2011) son of FBAR  form. Although this is not legal advice – common sense dictates that you should (at least) be compliant on a “going forward” basis.

5. Those of you who are U.S. Canada dual citizens should familiarize yourself with the provisions of the tax treaty in regard to reporting penalties. You will be happy when you investigate this.

6. Your tax and reporting issues are dependent on your decision to remain a U.S.  citizen. No two people are the same. U.S. citizenship is a problem to be solved. What are the principles that should be utilized to solve it? What are the questions to ask? You have been betrayed by the U.S. government. The U.S. is not the country it was. The U.S. does not subscribe to the very ideals that are the basis of your patriotism. This is a decision that must be based on principle – the question is: what is the right principle to make the renunciation decision? You have been betrayed by the U.S. My advice: make this decision based entirely on what works for you in your particular life circumstances. Recognize that you cannot predict the future with accuracy. There is no decision where there is no possibility of regret.

7. The “what is good for you principles” for you should recognize that:

–        The reporting requirements of FBAR, FATCA, etc. could put a serious strain on your marriage (the non-American spouse may be unwilling to live with the IRS);

–         Remaining a U.S.citizen may make it difficult you to avail yourself of normal banking arrangements;

–         Remaining a U.S. citizen will make it harder for you invest and save for retirement in your country of residence;

–        Remaining a U.S. citizen will force you to spend lots of time and money on reporting requirements. Remember the U.S. is now a nation of forms. Can you even afford the cost of compliance?

–        Remaining a U.S. citizen will force you to live in constant fear of the IRS

–        Remaining a U.S. citizens means that if you ever do accumulate wealth you will be subject to the U.S. estate tax rules (I have no idea how this would coordinate with the death tax rules of other countries)

–        If you have less than two million of net worth you are not a “covered expatriate”, you can (and possibly should) divest yourself of U.S. citizenship before you hit the two million mark (it is not uncommon in Toronto or Vancouver to own a house that is worth more than one million dollars)

–        If you have a net worth of two million or more, you will have to pay an exit tax if you renounce your U.S. citizenship. Remember that what you pay now, will be a savings to your estate. You can pass more money and assets to your children.

–        And now to the only positive of retaining U.S. citizenship: you can go back and live and work in the U.S. Is it worth it?

Your Wealth

Your wealth is only one factor in the equation. That said: for many U.S. expats the financial cost may be less to renounce now, rather than later. Think of your children.

A Final Thought

You have been placed in a horrible situation that is not of your making. Remember the bright side: as an expat you and (presumably most of your money) are already outside the United States.  After January 1, 2014 (the day FATCA takes effect) it will be very difficult for U.S. residents to leave. You are blessed with the wonderful opportunity of being able to live where you want. It is interesting that the U.S. constitution guarantees neither a right to enter the U.S. nor a right to leave the U.S. The Canadian Charter of Rights guarantees Canadian citizens the right to both enter and to leave Canada. In 1982, I was puzzled by this provision. I now understand why the constitutional right to leave a country is important!

In closing, read the following comment which describes how the participation in the OVDI program has completely transformed the life, health and wealth of this U.S. expat. Do you need the protection of the U.S. government or do you need protection FROM the U.S. government?

 “Just Me said…
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