Tuesday, October 16, 2012

FATCA Causes Chinese to ditch US passports

The long arm of the American taxman has many wealthy mainlanders ruing the day they decided to get US citizenship, and more are considering trying to get rid of it.
For many wealthy mainland Chinese who immigrated to the US, an American passport is a genie that cannot be put back in the bottle. More and more of them are thinking about renouncing their US citizenship, something that would have been almost unimaginable a decade ago, when getting a US passport was the ultimate status symbol in China.
afp.jpgWu, a 31-year-old housewife who asked to be identified only by her family name, said she started toying with the idea about a year ago. "I regret it to death, all of my friends regret it to death," said Wu about taking out US citizenship. "I'm never going back."
Behind her change of heart is tax. Under US law, American citizens and permanent residents, known as green card holders, are taxed on their worldwide income regardless of where they live. Other countries, including China, tax their citizens' global income. But it is the US, with its sophisticated systems and the long arm of its taxman, that has the highest profile.
In March 2010, Washington stepped up its tax collection efforts by enacting the Foreign Account Tax Compliance, or Fatca, aimed at cracking down on tax dodgers abroad. The regulations are set to be finalised before year's end, and the US Internal Revenue Service (IRS) expects the tightened compliance to generate as much as an extra US$9 billion over the next decade.
But it's not just having to pay up that's a problem. Americans and green card holders face onerous US reporting requirements, often have trouble opening bank accounts outside the US and frequently find it hard to form business ventures overseas because potential partners fear getting on the IRS' radar screen.
The number of Americans renouncing their citizenship rose to about 1,780 last year from just 280 in 2006, according to data from the US Federal Register compiled by the Sunday Morning Post. The figures don't distinguish between US-born and naturalised citizens, and don't include permanent residents who have given up their green cards.
But this bears risks. Take, for instance, Steven Ng-Sheong Cheung, a Hong Kong-born economist who became a naturalised US citizen. He fled to mainland China from Hong Kong after he was indicted by the IRS in 2003 for tax evasion. He is still holed up on the mainland, which doesn't have an extradition treaty with the US. But Cheung could be extradited to the US if he travels to jurisdictions that do have such treaties, and according to the US State Department, that is more than half the jurisdictions on the planet, including Hong Kong.
Renouncing US citizenship is also expensive. Deng, the Hong Kong lawyer, said it usually took one to two years to complete the process. To avoid an individual becoming stateless, the US requires anyone giving back citizenship to be a citizen elsewhere.
There is also the fee for legal advice, which runs up to US$30,000 at Deng's firm. And there's a so-called expatriation tax, a charge that has to be paid when the US passport is surrendered, and which is subject to a complicated calculation. Different rules apply depending on the date of surrender. For instance, people giving up their citizenship since June 16, 2008, can be taxed as if their worldwide assets were sold at fair value at the time, even though there are no actual sales.
People who gave up their US passports before June 16, 2008, and who are deemed to meet a certain threshold of income or net worth are generally subject to continued US tax on a certain amount of their income for 10 years following the date they are no longer considered to be US citizens.
Still, the number of mainland Chinese immigrating to the US continues to swell. Last year 34,693 did so, more than double the number in 1992, according to the latest available figures from the US government.
Many are seeking better health care, a better environment or asset protection. Political risk is also a key reason, said independent economist Andy Xie, a Chinese citizen who lives in Shanghai and does not hold a US passport.
Unlike the US, China doesn't recognise dual nationality, and Chinese who acquire foreign nationality are supposed to automatically lose their Chinese nationality, says Patrick Phua, a Beijing-based partner at law firm Ashurst.
Many mainlanders, like Wu, retain their Chinese citizenship while holding US citizenship, betting they will not get caught.
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  1. Unfortunately, I really don’t think Uncle Sam is going to change his mind on FATCA because of individuals ditching their U.S. passports; FATCA is a clear invasion of sovereignty even where there is an agreement. Countries doing the most business with the U.S. need to step up against Uncle Sam instead of surrendering their sovereignty in accommodating FATCA in their jurisdictions.

    Here in Canada, we are still waiting to see what is going to come out of the negotiations with our southern neighbors. I think that countries that have already committed to implementing FATCA in its current form have simply gone too far too fast in trying to please Uncle Sam.

    They should have done what he (Uncle Sam) always does first: protect and defend the interest of its citizens, including corporations, before accommodating any foreign interest.

    I have two articles in print right now where I dig deep into FATCA and the recently signed US-UK agreement to demonstrate for instance how, because of this FATCA agreement, Congress can even instill substantive changes to the UK tax law without the UK parliament legislating on it. I know many among the readers wonder how something like this is possible, yet it is.

    The Article is titled “US-UK FATCA Agreement: Congress Can Henceforth Instill Substantive Changes to the UK Tax Law” and will appear in the IBFD bulletin for international taxation sometimes before the end of this year; but next month another piece under “FATCA: Getting Rid of US Clients Will not Get You Off Grid” will appear in the Journal of International Taxation.

    Among other analysis in this article, I show how FATCA implementation could be successfully fought in courts if governments are not doing their duty number one, which is defending their own sovereignty. In Canada for example, we have a precedent of invalidating U.S. extraterritorial Acts thanks to a law called “Foreign Extraterritorial Measures Act” whereby the Attorney General in conjunction with the Secretary of foreign affairs can order Canadian citizens and companies not to obey a foreign country’s public law where it infringes Canadian sovereignty. They did it once in 1992, by issuing the “Foreign Extraterritorial Measures (United States) Order” or 1992 SOR-92-584 against Title 31 CFR Part 515 of the US Code of Federal Regulations or so-called “Cuban Assets Control Regulations.”

    Like FATCA, even though the main purpose was to forbid trade with Cuba, under these Cuban Assets Control Regs those dealing with Cuba were required to maintain records and, upon request to furnish information regarding such dealings to the U.S. Treasury Department. They affected all U.S. citizens and permanent residents wherever they are located, all people and organizations physically present in the U.S. and all branches and subsidiaries of U.S. companies throughout the world.

    Violations were subject to criminal penalties of up to 10 years in prison and corporate fines in millions of dollars. Many countries, including the UK, France, Japan, Australia have so-called “Blocking Statutes,” similar to the Canadian Foreign Extraterritorial Measure Act that they can put in motion against FATCA invasion, like France did here
    http://conflictoflaws.net/2008/french-court-applies-blocking-statute/ after years of timidity.

    So, watch out for these two articles because they contain out of the box analysis on FATCA. Cheers!

    Posted by Jeff Mukadi

  2. Cannot wait to read these 2 articles.

    The only distinction that I can make is that FATCA’s enforcement does not depend on a court ruling in another jurisdiction; the sanction is 30% withholding in the US from dispositions of US assets.

    Ron Marini

  3. I put a link below to a archived video below of the press conference then Canadian Foreign Minister Lloyd Axworthy gave after the final rules were published of the US Helms Burton Act back in 1996. Interesting to see the arguments that were made Axworthy and NOT picked up in the media or historical references of the time.

    Posted by Patrick Johnson

  4. Jeff, my sense is you won't see an invocation of FEMA if it is going to happen until the final regs are released which by the way as recently as a few months ago were to have been published by now. As of right now their is the before the end of October camp and the before the end of the year camp(I happen to be in the before the end of the year camp simply because I think we would have heard something by now if they were going to come out by the end of this week). I also think at this point Mr. Flaherty is quite content to keep trying to push the final regs off further and further into future at least until there is greater awareness of the law which slowly seems to be occuring.

    If the US and the Obama Administration really wanted an IGA with Canada then the President should pickup the phone and call Prime Minister Harper directly(Obama might not necessarily get the answer he wants but in my opinion if Obama is truely committed to FATCA he should be doing just that). In general all big agreements between the US and Canada are initialized and finalized with the direct involvement of the President and Prime Minister i.e. CUSTA, NAFTA, Acid Rain, and the new perimeter security agreement. Along these lines I have heard from pretty good sources their will NOT be and have NOT been any direct discussions between Harper and Obama on FATCA and in general the White House is directing all inquires regarding FATCA from foreign governments to US Treasury. This is not to say Obama doesn't support FATCA but from what I understand the White House won't get involved in any of the international negotiations. On the otherhand if the goal of Treasury is to get as many agreement as possible it would have to seem a bit disappointing that the President won't step in for any of the negotiations.

    I do have to wonder in the US Government whether or not there are some internal disputes about this entire process. One official comes out and promises something by a certain date and then that date is blown off completely. Where is the "Model 2" agreement for example and the draft FFI agreement.

    To Ronald's point. I do think if a particular country is going to fight FATCA just prohibiting its financial institutions from complying isn't really enough. They have to put the screws back to the US. One idea of mine would be to impose across the board standard witholding on all US resident recepiants of that country source income. So for example Canada could withold standard 25% witholding on all Canadian source income flowing to US resident investors including FDI. So McDonalds Canada for example would have to witholding a full 25% on intra company dividends flowing upstream to McDonalds HQ in the US Ditto for ExxonMobil, GM, Ford, basically every American company doing business in Canada. Of course other investment coming from other treaty partners into Canada would continue under normal treaty witholding procedures just US investment would be punished. Just as FATCA technically complies with the US Canada Tax Treaty Revenue Canada could create an after the fact witholding refund process to bring to comply with the treaty. There are probably only a few countries in the world that have enough US source FDI to do this. Canada, China, Germany maybe a few others.

    I guess the question is what does the world look like after something like this is done. What would be the US response. Would they cave or dig in even harder. My sense is Republicans would start looking for an exit from FATCA at this point I don't know what the Democrats would do. The issue is many of the Democrats who support FATCA aren't going to have a lot of sympathy for ExxonMobil or McDonalds getting hit with punitive Canadian witholding in retaliation for FATCA.