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Could Americans in France be given a way out of the double tax trap?

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Could Americans in France be given a way out of the double tax trap?

Life for the thousands of 'accidental Americans' in France caught in a double tax trap could be getting easier, if one US congressman gets his way.


All American citizens are required to file a US tax return -  regardless of where they live.

So Americans living in France need to file a French return and a US return. This applies to all citizens, even if they have never lived in the country, and thousands of people in France have found themselves to be 'accidental Americans' - liable for US tax because of citizenship gained through a parent.


The Foreign Account Tax Compliance Act (FATCA), which went into effect in 2010, requires banks outside the US to report any Americans with bank accounts to the American tax authorities - and has lead to many French residents who had no idea they had to file US tax returns getting a summons from the IRS.

Their plight has been recognised by the French parliament; which earlier this month heard a report, written by an MP from French President Emmanuel Macron's La Republique En Marche party in partnership with an MP from the centre-right, which calls for restrictions on the way FATCA is implemented in France.

It asks the government to limit it to those who earn above a certain income as well as to better align the French and US taxation systems to avoid people being forced into a double taxation situation.
“In the case of failure of these negotiations, we should envisage unilaterally pulling out of FATCA and restricting the transfer of information,” the report said, adding that regulators in the banking sector should remind banks that they are not allowed to discriminate against clients for having links to the US.
And there is a further glimmer of light from the US, where Representative George Holding has been working on a bill called the Tax Fairness for Americans Abroad Act (H.R.7358) that would create an alternative exclusion for nonresident US citizens living abroad.
The North Carolina Republican Representative said: “It is time to end this unfair practice."

H.R.7358 expired when the last session of Congress ended, but Holder is planning to introduce an updated version soon and discussed the details of his plan at an event organized by Republicans Abroad in London in April.

In the plan, Americans working overseas could select a non-residential taxpayer status that would exempt them from having to file income tax returns with the IRS and would exempt them from FATCA reporting.

They would, however, still have to report and pay taxes on income earned in the US.

Idea born out of civil war

The US is the only industrialised country that exercises citizenship-based taxation. Even in countries with a reciprocal income tax agreement, US citizens must file annual tax returns even if they don’t owe any additional taxes. And if they own a business or property abroad, things quickly get more complicated.

Citizenship-based taxation is a holdover from the Civil War, when authorities saw taxation as a way to punish wealthy draft-dodgers who fled to Canada.

Congress continued the practice of taxing citizens abroad when it introduced the modern income tax in 1913. But in the era of globalisation, where more people are living and working abroad as a matter of course, the rules make less sense.

“Citizenship taxation may discourage both initial migration to the United States as well as the decision by migrants to become permanent legal residents or citizens,” wrote Ruth Mason, a professor at the University of Virginia’s School of Law, in a paper on citizenship taxation in 2016.

The only other country that operates on a citizenship-based taxation model is Eritrea, which has been on the receiving end of intense international pressure for its practices.

Eritrea, a country of less than 6 million people bordering Ethiopia in eastern Africa, levies a flat 2 percent income tax on its citizens living overseas. The UN Security Council condemned Eritrea in 2011, saying the country was using “extortion, threats of violence, fraud and other illicit means” to collect taxes outside of Eritrea.

Giving up citizenship

For Americans, the only way to escape the tax obligation is to give up your US citizenship, which is exactly what Facebook co-founder Eduardo Saverin did in 2012. The Brazilian-born Singapore resident relinquished his US passport just before Facebook’s IPO made him an even wealthier man, ostensibly to save on taxes.

Foreign Policy noted that the US can deny a visitor visa to any former citizen “who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States.”

The US can also deny new passport applications and revoke existing passports of citizens who owe more than $2,000 to the IRS.

Renouncing US citizenship is not without its own cost: The renunciation fee is $2,350, the highest in the world. (And if you owe the IRS any back taxes, those are due when you relinquish your citizenship.)

Renunciation was free until 2010, when the fee was set at $450, and in 2015 it was set at its current level.

But the cost doesn’t seem to have been a deterrent. According to the US Treasury Department, more than 5,000 people chose to relinquish their American citizenship in 2017; only 530 did so in 2007.


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