CBT, tax treaties, and the saving clause: interesting article

From an article,"The intersection of US tax treaty policy, tax reform and BEPS"  at http://www.lexology.com/library/detail.aspx?g=3cae7b4e-dce0-4a84-9e3d-30f5dfb89194:

The mechanism devised to accommodate a policy of using treaties primarily to make concessions to foreign persons investing in the United States, and not to US persons investing abroad, while nevertheless abiding by commitments to residents that are indispensable to any treaty is the 'saving' clause. Found in Paragraphs 4 and 5 of Article 1 of the US model, the article dealing with the general scope of the treaty, the saving clause declares that the treaty has no application – does not exist – for US persons, including both US citizens and US residents (after application of the dual resident provisions of Article 4 of the model). Having thus removed US persons from any entitlement to treaty benefits, Article 1(5) carefully restores a limited number of benefits to all US persons and a second group of narrow benefits to US persons who are neither US citizens nor US permanent residents. Into the first group fall the articles on relief from double taxation, non-discrimination and the mutual agreement procedure, as well as the commitment in Article 9 to make correlative adjustments in transfer pricing cases and rules for pensions, social security payments, child support and the treatment of pension funds. In the latter category are other rules for pension funds, the treatment of income from government service and income of students, trainees and diplomats. The saving clause can sometimes be overlooked or its potency underestimated, but it appears in every US tax treaty and US treaty policy cannot be understood without it. Nothing in the tax reform debate or in the discussions on BEPS suggests a need for any change.

A second unique feature of the US model lies in its extraordinary tilt towards the country of residence. The most common species of international double taxation in cross-border operations is the taxation of income by both the country of source (where income is earned) and the country of residence (where the taxpayer resides). All countries are countries of both source and residence, but the relative degree to which they fall in those categories differs greatly from country to country – as do perceptions of that degree (which may be a different matter). The OECD model is relatively favourable to the country of residence, which is hardly surprising. The roots of the OECD are in Europe and until relatively recently its membership has been limited to capital-exporting nations. However, the US model goes much further than the OECD model in favouring the country of residence. This can be clearly seen in Article 11 on interest, in which the US model calls for a reciprocal maximum rate of 0% in the source country, while the OECD model proposes 10%. Interest probably represents the largest of cross-border income flows.
[..]
So ... the United States has staked out a position that is more favourable to the residence country than even the OECD model. This stands in marked contrast to the position of the United Nations, whose own model convention – developed with the active participation of many capital-importing countries – is much more oriented towards source-based taxation than the OECD model.

if you accept for the sake of argument the CBT premise that all US Persons everywhere are tax-resident in the US, it all begins to make a demented kind of sense: Americans abroad aren't really residing in another country and earning a living, raising a family and living a life - they're actually importing capital from the source country (e.g. the UK) into America.  So naturally, tax is due.

I'm so relieved there's an explanation, even though I think it's insane.

OK... So enforced remittance, the same approach some third world countries take when they export workers who then send money back to their families but enforced by the IRS.

Yeah, makes some sort of sense...

Surprisingly, one of the worst factors that's not understood is when a USC abroad pays tax and penalties to the US Treasury (IRS), money is taken out of the local economy where services are provided, and sent to the US where no services are provided to that person. Revenue for free at the expense of a local (foreign) economy.

Revenue for free at the expense of a local (foreign) economy.

The following post could be misunderstood, so let me start with the clear understanding that it is not directed towards the good people (professionals) who assist on this board, helping those of us who are struggling with US tax. They deserve to make a living providing services which utilise their individual talents, and which they have undoubtedly studied long and hard to acquire.

There is a counter argument to my previous post ("Revenue for free at the expense of a local (foreign) economy.). A great many USCs abroad do not pay tax to the US. They fall within the provided exclusions, exemptions, etc. Nonetheless, to take advantage of the exemptions and exclusions, and under the Treaties, they must file a US tax return to claim them. Doing a US tax return isn't always easy.

And how do they file? Many use a CPA (or the larger CPA services) based in the US, usually because they provide the service at the least expensive prices. The fees for those filings contributes exclusively to the US economy. A great many others use TurboTax, TaxAct, and so on. Have a look at where the companies that own these software services are based. Again, the purchase of the software likely contributes mainly to the US economy. The money does not go to the local (foreign) economy.

Some do their US tax returns themselves by downloading the PDF forms from the IRS, so no money leaves the local economy (unless, of course, they need to be certain of delivery and use a commercial mail service such as US based FedEx, oops, more money to the US economy).

Those who use a local (foreign based) CPA are the only ones who use "filing to the IRS" as a means to contribute to their local economy.

Even when USCs abroad do not owe any US tax, a great deal of money still finds its way into the US economy, not the local economy.     

I get the impression CBT is as much about foreign policy and American exceptionalism, as actual money streams.  It's too complex for me to follow with much confidence, but I guess that constantly arrogating to itself extra-territorial positions (CBT, FATCA in its original form, national security measures, etc) allows the U.S. to display and use its huge power vis-à-vis other nations - power that's not going to be enforced with guns but through measures that often may not require or receive full  Congressional/Parliamentary scrutiny: treaties, investment (or the threat of disinvestment), most-favoured-nation status, and so on. 

"All your residents are belong to us!". 

Which for the most part other (developed) nations are only too happy to go along with.  The benefit cuts both ways.  As I and others before me have said, it's not about us small-fry, it's about making the point that the US claims the right to tax a section of another country's tax base, or threaten another country's banks with 30% withholding sanctions, etc. 

Makes my head hurt trying to think about it.

All this fills me with joy, as it keeps over a million US tax professionals in employment. Is Federally supported job creation not the point of the whole exercise? 

haha, I know you aren't all about exploiting people guya. You listened to me for free and helped out when you didn't have to

All this fills me with joy, as it keeps over a million US tax professionals in employment. Is Federally supported job creation not the point of the whole exercise? 

 As one door closes, another opens.   

Is Federally supported job creation not the point of the whole exercise? 

 

Speaking of (US) Federally created jobs, should we discuss how Federally mandated FATCA creates 1000s of jobs abroad?, although sadly paid for out of local (foreign) economies. The gift that keeps on giving.

I can just think of many more fun things the US could force me to do than fill in endless, undecipherable forms every year. They could force me to attend a Major League Baseball game, or take my kids to Disney Land, there are some American activities that I would be more than happy to take part in and pump money into America for

Speaking of (US) Federally created jobs, should we discuss how Federally mandated FATCA creates 1000s of jobs abroad?, although sadly paid for out of local (foreign) economies. The gift that keeps on giving.

Some of that will be jobs for locals, which is not a bad thing.  And it's largely the banks who are feeling the pain, which surely they richly deserve.  :-)

The US seems to be a little taken aback by the response of TROTW to FATCA.  Well done OECD for seeing the opportunity and acting on it.  With any luck the CRS is going to establish a fair and sustainable global or semi-global system of financial account transparency which will hit at least some of the right targets.  It may be over-optimistic to expect the US to abandon FATCA and join  in with the multilateral initiative, but the more consensual OECD approach is bound to influence the way FATCA evolves.  IMO

So CBT allows the US to keep tabs on its overseas citizens earnings and income, and FATCA now allows the US to keep tabs on its citizens' foreign bank accounts (or would do if the IRS had time to read the reports  ). 

One of the remaining $64 questions is, say a US citizen abroad, for instance a longstanding expat or an accidental American, has only just heard of CBT, and FBARs, and FATCA , and the world's most expensive route to renunciation, and all the rest of the unpleasant news, and is now walking around in a state of shock, trying to decide what is the best course of action. 

Should they pony up the $2350 and renounce? 

Should they "become compliant" and resign themselves to the costs of remaining that way? 

Or should they just ignore the whole business, betting that (a) the IRS probably will never notice, and (b) even if they do notice, as long as the US Person has no US transactions and never travels to the US, the difficulties inherent in cross-border collection will probably ensure that as long as there's not much at stake (e.g. hundreds of dollars rather than hundreds of thousands), the harrassed and target-driven agent is probably going to slip it back on the pile and look for someone more promising to pursue.

I opted for renunciation, rather than ignoring the problem, partly out of an uneasy feeling that there might be further changes in the future which could make cross-border collection (not just of taxes, which at my income level would never amount to much, but of the insane IRS penalties) a whole lot easier.

I just read on the OECD website about something called "The Convention on Mutual Administrative Assistance in Tax Matters"
(http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm) which seems alarmingly relevant to the problem of cross-border collection:

The Convention was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010.  The Convention is the most comprehensive multilateral instrument available for all forms of tax cooperation to tackle tax evasion and avoidance, a top priority for all countries.

The Convention was amended to respond to the call of the G20 at its April 2009 London Summit to align it to the international standard on exchange of information on request and to open it to all countries, in particular to ensure that developing countries could benefit from the new more transparent environment. The amended Convention was opened for signature on 1st June 2011.

Since 2009 the G20 has consistently encouraged countries to sign the Convention including most recently at the meeting of the G20 Leaders Summit in September 2013 where the communique stated “We call on all countries to join the Multilateral Convention on Mutual Administrative Assistance in tax Matters without further delay.”  Currently over 60 countries have signed the Convention and it has been extended to over 10 jurisdictions (Chart of Participating Jurisdictions). This represents a wide range of countries including all G20 countries, all BRIICS, almost all OECD countries, major financial centres and a growing number of developing countries.

 The amended Convention facilitates international co-operation for a better operation of national tax laws, while respecting the fundamental rights of taxpayers. The amended Convention provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims.

The Convention has taken on increasing importance following the G20’s call for automatic exchange to become the new international standard of the exchange of tax information, and the subsequent development of the Standard for Automatic Exchange of Financial Account Information.

Given the Convention provides the ideal instrument to swiftly implement automatic exchange, Competent Authorities from 61 jurisdictions have signed a multilateral agreement under Article 6 of the Convention, which provides for the automatic exchange of information. The competent authority agreement implements the Standard for automatic exchange, specifying the details of what information will be exchanged and when. While the agreement is multilateral, the actual exchanges are bilateral.

My emphasis added.  Note it does not say collection of penalties, only of tax claims.  Food for thought, though.  And not just for US Persons. 

iota, I tend to assume that the USA is not Eritrea and as a rule will hopefully not try to screw over people who don't owe LOTS of taxes. If some dual national granny gets caught and she owes $1000 worth of taxes I hope they will not then say "that's a $1000 in taxes + $500,000 in fines".

As much as I think that CBT is a pretty disgusting concept I also want to (God knows why!) give the USA the benefit of the doubt and assume that lots of people in the government see FATCA as a way of catching people who are tax criminals avoiding paying millions in tax. I hope this isn't about catching accidentals or grannies who owe zero or negligible tax. Even if the law as it stands allows it.

If the USA does do that, maybe that will be the most powerful weapon against CBT, millions of people being screwed would create the sort of legal pushback that could get rid of CBT.

Maybe I am just feeling hopeful today

iota, I tend to assume that the USA is not Eritrea and as a rule will hopefully not try to screw over people who don't owe LOTS of taxes. If some dual national granny gets caught and she owes $1000 worth of taxes I hope they will not then say "that's a $1000 in taxes + $500,000 in fines".

"Some dual national grannie"?  That's quite offensive, in my opinion.

As it happens, you don't have to owe any tax at all to be at risk of crippling IRS fines.  Meet the FBAR.

However, the most worrying thing about FATCA and CRS and the other quasi-global tax programmes that are now being put into place is that they will have to be automatic.  The volume of data simply can't be processed otherwise.  That's likely to mean that if tax is due, or a penalty is incurred, collection measures will be triggered. 

However, I agree that some countries, including (I trust) the UK, are unlikely to feel comfortable about assisting with collection of the excessive IRS penalties without judicial case-by-case scrutiny.  As I noted, the Convention on Mutual Administrative Assistance only refers to tax claims, and doesn't mention penalties.

... give the USA the benefit of the doubt and assume that lots of people in the government see FATCA as a way of catching people who are tax criminals avoiding paying millions in tax.

All those criminals with $10,000 in foreign accounts?