More and More Americans are Renouncing their US Citizenship

We are familiar with the saying, “The dollar isn’t what it used to be”, but it is surprising to hear more and more people making a similar statement in reference to their American passport.

As an indication of this, in 2011 nearly 1,800 American expatriates renounced their American citizenship! Renouncing citizenship has taken a sharp upward turn, from an average of 482 per year to 1,788 in 2011. Even though 1,800 is a drop in the bucket compared with the estimated 6.3 million Americans working abroad or the number of foreigners seeking US residency and citizenship, many consider this to be an alarming development. Among the famous American citizens who have renounced their US citizenship are Ted Arison, the late founder of Carnival Cruises, Michael Dingman, a former director at Ford Motor Co., and Eduardo Saverin, one of the founders of Facebook. Facebook is due to launch itself on the US stock market, in the third week of May 2012, with an Initial Public Offering (IPO), in which shares will be priced at $34-$38 USD each. This could value Saverin’s holdings in the company at more than $4 billion USD.

Two American tax-filing requirements are considered to be the main drivers for this new development:
1.The Foreign Bank Account Reporting Act (FBAR), which has been around for some time, but which now carries more rigorous penalties for non-compliance.
2.The Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and will become effective on January 1st 2013.

FBAR requires all Americans with at least $10,000 in overseas bank accounts, including those living abroad, to file a supplementary form disclosing all of their foreign accounts. Non-compliance with FBAR can lead to hefty fines. FATCA requires foreign financial institutions such as banks, hedge funds, and private equity funds to provide the American government’s Internal Revenue Service (IRS) with information on US clients. Institutions that do not comply with FATCA will be subject to a 30 percent withholding tax on certain US-sourced payments and proceeds of property sales beginning in the 2013 tax year.

As a dramatic, unforeseen consequence of the upcoming FATCA, we see that more and more foreign banks and investment ventures are no longer willing to accept US citizens as clients or business partners. For example, HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) have all admitted to turning away US-related business. UBS, the world’s biggest non-US private bank has recently announced that it would discontinue offshore accounts for US citizens; it seems a cost-benefit analysis of FATCA does not favor maintaining American clients.

With the exception of the system applied in the US, there are basically two types of taxation in the countries of the rest of the world:
-Source Taxation, which means that the income is taxed in the country where it has been produced.
-Residency Taxation, which means that the worldwide income of the residents of a country are subject to tax.

Based on the Source system, countries tax income arising or having its source within their territory and based on the Residency system, countries impose a tax on income because of the affiliation between the country and the person earning the income.

The American government employs a system based upon citizenship, which means that they tax the worldwide income of both resident and non-resident citizens. Under the system applied in America, it does not matter if you live in the US or where your income has been produced, all American Citizens, are liable to tax over their world wide income. The lobbying group American Citizens Abroad (ACA) has published an article in the influential journal Tax Notes International, suggesting that the US would be more competitive in world markets if it dropped its citizenship-based tax system to one based solely on residence. And all this is happening at a time when a recent World Bank study showed that, unlike America, “40 economies made it easier to pay taxes during fiscal years 2010/2011.”

America, which has been known historically as being a bastion of free enterprise, having one of the most effective economic systems in the world, always having welcomed and supported both economic immigration and expansion of American economic interests throughout the world, is now posing an important question to its own citizens and the citizens of the world: Whether or not you are a dynamic entrepreneur just starting out or an experienced business person with one or more solid business enterprises, do you want to be a US citizen and open up both your American and world-wide economic activities to the scrutiny of the IRS, or would you rather prefer to establish residency in a country that supports rather than discourages success and expansion?