The US system of worldwide taxation, often the target of ire from expat Americans and a reason for rising citizenship repudiation, needs to be re-thought, a group argues.

While the US Senate and House of Representatives have voted through bills over tax cuts and changes, these measures have disappointed a lobby group acting for American expats that says the country should quit worldwide tax and make reforms.

American Citizens Abroad yesterday said it regrets that the House and Senate bills did not recognize the need for residency-based taxation to replace the current worldwide system enforced by the US, although the ACA hoped there remain possible changes in the legislative season. 

On Saturday, the Senate debated its tax package, which has to be reconciled with the House’s version, such as around differences over areas such as estate tax.

The US system of tax, which applies to any American adult across the world even if they haven’t spent a single day in the US since birth, is seen by organizations such as ACA as an unjust burden because it discourages Americans from working in low-tax foreign jurisdictions, as can be done, for example, by expat British or German citizens. Also, the US Foreign Account Taxation Compliance Act, or FATCA, which was enacted in 2010, imposes heavy compliance burdens on foreign financial institutions dealing with US expats. As a result, many such persons struggle to obtain financial services such as bank accounts.

In a statement about the wrangles on Capitol Hill in recent days, ACA said: “Although chances are slim, there is an opportunity for residency-based or territorial treatment to be included.  Amendments for the repeal of FATCA were not brought to the floor of the Senate for debate. No action was taken with respect to the Foreign Earned Income Exclusion. Nothing however is final and anything can, and often does, happen.” 

“Although ACA is disappointed that some version of our approach to RBT [residency-based tax] has not been included in this tax bill, we strongly believe that there is continued opportunity for such reform to become law,” it continued. 

“Efforts by all the organizations advocating up on the Hill these past months and during the tax reform debate, ACA, Asia Pacific Council of American Chambers of Commerce (APCAC), AmCham Abu Dhabi, Americans For Tax Reform (ATR), Democrats Abroad and Republicans Overseas, played a key role in increasing the awareness of the issue and providing Congress with ideas on reform.  It is unprecedented as never before has so much been written on the subject in the media and have so many offices been educated on the issues,” it said.   

A few weeks' ago, the American Chamber of Commerce in Hong Kong called for a move towards residency-based taxation (see here). 

A result of existing US tax law is that an increasing number of Americans are repudiating their citizenship. The trend is ironic given how the US also offers residency to wealthy foreign investors and remains a destination for immigrants. Cross-border wealth management for expat Americans, and for those living in the US or with exposure to the US market, remains a complex area.