What is CBT?
CBT is an acronym for citizenship-based taxation.
What is citizenship-based taxation?
Citizenship-based taxation is the government practice of personal taxation whereby a country’s citizens are taxed no matter where they reside in the world.
CBT is currently practiced by the US alone among first-world countries.
CBT contrasts with RBT, residence-based taxation, whereby only a country’s residents are taxed.
What is the problem with CBT?
There are multiple problems with CBT, as they apply to US citizens living outside the US:
It forces individuals to pay for government services - roads, highways, dams, bridges, public schools, hospitals, fire services, police, courts, national parks, military protection - which they can never enjoy.
It prevents individuals from opting out of the fiscal system ("voting with their feet") by leaving the country.
In conjunction with the US practice of conferring citizenship to children born to a.) foreign parents temporarily in the US, or b.) US parents permanently resident outside the US, it forces itself upon people with no ties - familial, cultural, political, or otherwise - to the US.
This creates, for example, absurd situations like Canadian "border babies", whose parents have no ties to the US, apart from the fact that at a certain moment in time the closest delivery ward was just across the border in the US, and where their child was born. That child will forever be required to file tax returns, and pay taxes, to the US.
In conjuction with FATCA, it creates incentives for foreigners - banks, business partners, employers, even spouses - to eschew relationships with US citizens in order to avoid being caught in onerous and risky reporting and documentation requirements.
But many other countries tax worldwide income; why shouldn't the US?
This question confuses two issues:
Taxation of residents on their worldwide income. This is, in fact, a characteristic under residence-based taxation (RBT), and is what is practiced by many countries (though not all, since some countries restrict themselves to taxing on a local, territorial basis).
Taxation of non-residents on income derived in their country of residence or elsewhere, but either way outside the jurisdiction of the taxing country. This is CBT, and what this FAQ discusses.
What are the alternatives to CBT?
The alternative to CBT is RBT, residence-based taxation, which is practiced by practically all countries outside the US. Under RBT, broadly speaking, taxpayers only pay taxes or file tax returns to the country (or countries) in whose jurisdiction they are resident or commercially active.
Why don't non-resident Americans want to pay their fair share of taxes?
Non-residents do pay taxes to the countries in which they reside and where they receive government services. In fact, most non-resident US citizens live in countries in which the tax burden is greater than that of the US.
And anyway, what is the "fair share" of tax that should be paid by an individual who receives no government services in return? As things stand, 96.6% of the world's population (i.e., everyone outside the US) thinks that the answer to that is zero.
Isn't US CBT set up in such a way that it relieves most non-resident taxpayers from paying any taxes to the US if they already pay taxes elsewhere?
For most taxpayers - yes. However:
It doesn't relieve them from having to file taxes to the IRS every year, in addition to whatever filing requirements they have in their own countries. In fact, given the US's extremely complex tax system, the expense of preparing a tax return for the US can be thousands of dollars. This may a be greater expense than the tax return they prepare for the country in which they live and work, frequently only to show that no US taxes are due.
This setup covers most but not all non-resident taxpayers.
Further, we would argue that non-residents shouldn't be "taxpayers" in the first place.
Isn't US CBT set up in such a way that it avoids double taxation of non-resident taxpayers?
In theory, yes. In practice, not really.
For people with very simple life situations - such as those having a salary, and perhaps a recognized pension plan - US CBT avoids double taxation. However, for people with more complicated life situations - such as self-employed individuals or business owners who might have unrecognized pension plans or other deferred savings, investments in mutual funds or more exotic vehicles - US taxes will frequently take a chunk out of assets and income that have either already been taxed or been defined as tax-free or tax-deferred under the laws of the country in which they were earned.
The value you get as a US passport holder is that if you ever get into trouble somewhere in the world, the Marines will come and rescue you. That should be worth paying your taxes for, isn't it?
The majority of non-resident US citizens live in stable, democratic countries, such as Canada, the UK, Australia, Japan, the EU in general, and so on. They are extremely unlikely to require the Marines saving them at any time.
In those cases where a person holds dual nationality - of the US and another country - the US can by international law not offer diplomatic help anyway when that person is in the other country.
Any help that a US citizen receives for evacuation from a trouble zone is fully charged. The government is required by law to seek repayment of expenses for the evacuation of Americans from overseas locations. Source. Having paid a lifetime of taxes to the US still does not guarantee free diplomatic or military assistance.
If you think paying taxes to your homeland is so bad, why don't you just leave?
We're already talking about people who have "left", in the sense that they no longer live in the US, or never even lived there. Here are some kinds of people to whom CBT applies:
- People who were born in the US, but who decided to leave and live elsewhere
- People who were born in the US to foreign parents and who left the US when they were kids
- People who were born abroad to at least one US citizen parent who automatically transmitted citizenship to them
- People who came to live and work in the US, received a green card, then decided to return to their home country but didn't formally announce their departure
This means that "leaving" in the colloquial sense of the word does not help those caught by CBT. The only sense in which one could "leave" that would be usefully be applied to this discussion is by renouncing US citizenship.
If you don't see any value in holding US citizenship, why don't you just renounce?
There are a variety of reasons for not renouncing US citizenship:
- A person holds no other citizenship, and would remain stateless if he gave up his US citizenship
- Renouncing would anyway not extinguish any of the obligations under CBT up to the time of renunciation, meaning that any outstanding tax returns and payments (the reason for renunciation) still need to be completed
- For people who have significant assets or income, renouncing triggers a massive exit tax, even if those assets or income were wholly built up overseas by the renunciant while living overseas
- Renouncing costs thousands of dollars in fees (which were recently raised four-fold due to the large number of people exercising this option, and despite the US being signatory to the UN Universal Declaration of Human Rights which precludes denying a person the right to change his nationality)
- Renunciants are concerned by rhetoric by US politicians that threatens to bar them from ever re-entering the US, where they may still have family or where they might wish to visit as tourists.
Isn't there a streamlined program to get out of this mess quickly?
The streamlined program still requires three years of tax returns and six years of FBARs. It is not an expedited ability to renounce. It is a way to get into the US tax system, which exactly what is being protested against here. A participant in the streamlined program does not get a CLN1. To achieve this, renouncing still requires five years of tax returns (two more than required by the streamlined program). Credit
What if everyone who didn't want to pay taxes just left the US?
Probably nothing too dramatic. Other countries, which are no less modern and offer no less of a social net to their residents, have contended with this issue without requiring their expatriate citizens to keep paying and/or reporting taxes.
CBT has been in force for a very long time, and non-resident Americans have always had to file their taxes to the US. What’s changed now?
CBT was never very strongly enforced. The recent enactment of FATCA, the Foreign Account Tax Compliance Act, is forcing banks worldwide to report on their clients defined as "US persons" (a term defined much more broadly that might naively appear). Some of these clients are indeed the intended target of this legislation as US residents hiding assets offshore. However, most of them are non-US-resident US citizens who are neither rich nor hiding assets, but simply hold local bank accounts with no nefarious intent. If it weren't for CBT, these people would not fall under the definitions of reportable individuals since they would have no tax obligations to the US.
In effect, FATCA has exacerbated the difficulties of CBT, shedding light on what was previously a provision unknown by many.
Have any disinterested third parties weighed in on the issue of CBT?
The End of Taxation without End: A New Tax Regime for U.S. Expatriates, Bernard Schneider, Queen Mary University of London, October 1, 2012, Virginia Tax Review, Vol. 32, No. 1, 2012
The Case Against Taxing Citizens, Reuven S. Avi-Yonah, University of Michigan Law School, March 25, 2010
Offshore Disclosure Programs Discourage Tax Compliance, Nina Olson, National Taxpayer Advocate annual Report to Congress 2012
A Coherent Policy Proposal for U.S. Residence-Based Taxation of Individuals by Cynthia Blum and Paula N. Singer, The Vanderbilt University Law School, Vanderbilt Journal of Transnational Law, May 2008.
Are there any arguments in favor of CBT?
Here are some arguments to support CBT, from “The Case against Taxing Citizens” by Reuven S. Avi-Yonah, linked above. (They are refuted in that same document).
The benefits argument: US citizenship by itself confers benefits that justify taxation.
The ability to pay argument: US citizens are part of a community and should contribute their fair share to the pool of income that is redistributed across the community.
The administrability argument: Citizenship is an administrable proxy for domicile, and domicile is a justified basis for taxation.
Additional arguments are provided in "Revisiting the Tax Treatment of Citizens Abroad: Reconciling Principle and Practice", Michael S. Kirsch, Notre Dame Law School, October 28, 2013, 16 Florida Tax Review 117 (2014), Notre Dame Legal Studies Paper No. 1457 and summarized on the Franco-American Flophouse blog, as follows. They are also excellently refuted there.
Membership: American citizens abroad retain ties to the United States and are still considered part of the nation.
Future emigration: A switch from citizenship-based to residency-based taxation would provide incentives for many more Americans to leave the U.S.
What is the current political attitude towards CBT?
- The Republicans have adopted a resolution that concludes as follows:
"RESOLVED, the Republican National Committee urges Congress to repeal Citizenship-Based Taxation and its supporting legislation such as FATCA and FBAR; and be it further
"RESOLVED, the Republican National Committee urges Congress to permit restoration of citizenship for those who were compelled to renounce their citizenship because of the crushing burdens of FATCA and FBAR;
"and, be it finally RESOLVED, the Republican National Committee urges Congress to align U.S. law with the laws of other industrialized countries of the world by limiting taxation to Residence Based Taxation on American Citizens living overseas which will encourage increased employment of Americans and increased export of American goods and services."
- The Republican Staff Committee on Finance of the United States Senate proposal on reform, on page 282 says
"The United States needs to rethink its taxing rules for nonresident U.S. citizens."
and refers the reader to a proposal developed by American Citizens Abroad: Residence Based Taxation: A Necessary and Urgent Tax Reform (March 2013)
- The Democrats have not directly addressed the issue of CBT, however Democrats Abroad, "*the official Democratic Party arm for the millions of Americans living outside the United States*" has the following in its platform:
"We FAVOR restoring residence-based taxation, thereby placing American citizens residing abroad in the same position as citizens of all other industrialized countries, which do not tax their nationals residing abroad."
Is CBT called by any other names?
For those interested in further researching the subject, citizenship-based taxation is also referred to by these names:
- Passport tax
- Citizenship tax
- Birthplace tax
- Diaspora tax
Certificate of loss of nationality ↩