American Citizens Abroad Calls for Residence-Based Taxation

HOW U.S. INTERNATIONAL TAX POLICY IMPACTS AMERICAN WORKERS, JOBS, AND INVESTMENT

Statement of American Citizens Abroad, Inc.

March 25, 2021

Senate Committee on Finance
Attn. Editorial and Document Section
Rm. SD-219
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

Submitted by:
American Citizens Abroad, Inc.
2001 L Street, NW, Suite 500
Washington, DC 20036

American Citizens Abroad, Inc. appreciates the opportunity to submit this statement.

Overwhelmingly, attention to the subject of US international tax policy and the statutory and regulatory rules that surround this subject focuses on corporations and other business entities. Individuals, in particular American citizens residing outside the United States, are almost always ignored. In the early 1960s, when Congress was enacting Subpart F for corporations, it tinkered a bit with rules for individuals that had sat in the Code since 1926. When it did work on rules for Americans abroad it focused almost solely on the foreign earned income exclusion¹, which helps US corporations that employ expats under agreements to provide for tax equalization. This explains why at hearings on the foreign earned income exclusion (section 911) witnesses typically represented oil and gas, construction and aircraft companies. The day-to-day plight of ordinary Americans living and working abroad was not so much front and center.

The 2017 Tax Cuts and Jobs Act is a prime example. The focus was entirely on moving to rules that would more favorably tax foreign source income of US corporations. Broadly speaking, this is referred to as a territorial approach. In the final moments of enactment, the absence of any action on US individuals was flagged, but it was too late to do anything other than say it was something to come back to.²

The territorial approach for taxing US companies, not taxing or lightly taxing foreign income, is the same thing as residence-based taxation (RBT) for individuals. RBT would generally not tax the foreign income of individuals truly resident outside the U.S. They would remain taxable on US income, and they would remain in the tax system, filing returns and being subject to examination.

Residence-based taxation is the approach, we believe, followed by every other country in the world except for hard-put-upon Eritrea. Certainly, all other industrialized countries apply RBT.

Congress should enact RBT. RBT can be made revenue-neutral, extraordinarily tight against abuse, and such that no one is worse off under RBT than he or she is under current citizenship-based taxation (CBT).

ACA has described in detail a roadmap of "vanilla" approach to how taxing US citizens resident overseas based on residence might be structured.³

ACA, with the help of District Economics Group, has analyzed this so-called “vanilla” RBT approach.⁴

On behalf of Americans living abroad, ACA hereby requests that this Committee hold a hearing on taxation of Americans abroad and what it would mean to adopt residence-based taxation. Ask the Treasury Department what it thinks about this as a matter of tax policy. Ask the economists at Treasury Department and Joint Committee on Taxation what the historical and background information is and what is the baseline data affecting this subject. How many Americans abroad are there? How many are filing federal tax returns and owe a significant amount of tax? What are the income and assets profiles of these individuals? How might RBT be structured to be revenue neutral? How might it be made very tight against abuse? What are the implications for the US's approach to tax havens? What are the implications for exchanges of information? How do Americans abroad contribute to the creation of jobs in the US and the export of goods and services from the US?

Congress, ACA believes, will want soon to revisit portions of TCJA. This means the door is ajar for considering residence-based taxation for individuals. In the distant past, Congress has always at least taken some action with respect individuals when dealing with corporations. Congress should not again ignore the Americans abroad.

Thank you for your attention to this statement.

Jonathan Lachowitz
Chairman-ACA

Charles Bruce
Chairman-ACAGF

Marylouise Serrato
Executive Director-ACA

American Citizens Abroad
Washington, DC