Red, White and Boo It’s legal for US citizens to renounce their nationality though the government can’t imagine why any God-fearing person would do so and has made the process a tax nightmare, says Josh Spero
Red, White and Boo
It’s legal for US citizens to renounce their nationality — though the government can’t imagine why any God-fearing person would do so and has made the process a tax nightmare, says Josh Spero
‘THE RIGHT OF expatriation is a natural and inherent right of all people… Any declaration, instruction, opinion, order, or decision of any officers of this government which restricts, impairs, or questions the right of expatriation, is hereby declared inconsistent with the fundamental principles of this government.’
With the sort of myopia only governments can muster, the United States in the Expatriation Act of 1868 thus declared that it would recognise foreign citizens who wanted to become Americans and protect them from the grasp of their native states. It turns out that expatriation works the other way round, too — and can save former Americans millions of dollars.
Americans expatriating have been getting politicians hot under their white collars ever since the Act. Since Americans are taxed on a global basis, expatriation means a loss of revenue, as well as obligations such as military service, so when wealthy Americans expatriate, the government feels it in its pocket. Beyond the financial, there is also a perception of disloyalty, treachery even: who would leave the land of the free and the home of the brave but a tax-dodging scoundrel? Eighteen hundred people in 2011, apparently — eight times 2008’s number, according to Yahoo Finance.
Congressmen have treated this with their customary rhetoric. They are ‘Benedict Arnolds who would sell out their citizenship, sell out their country in order to maintain their wealth’, said Representative Neil Abercrombie, as recorded on renunciationguide.com, an excellent resource. They have ‘engaged in the despicable act of renouncing their allegiance to the United States’, according to Representative Sam Gibbons. They are, per Mr Abercrombie once again, ‘sleazy bums’. Those who leave are named and shamed in the Federal Register, the US government’s official record.
The issue flared up once again when Eduardo Saverin, a co-founder of Facebook and a long-term resident of Singapore, decided to give up his citizenship before the company’s IPO, which made him a billionaire. Becoming a resident of Singapore was ‘more practical’, according to his spokesman.
It did not wash with politicians, who suggested that he would be avoiding $67 million in taxes. Senator Charles Schumer even tried to promulgate the Ex-Patriot Act, barring infidels from ever returning to America and re-imposing taxes on ex-citizens, negating the entire point of leaving.
IF THE EX-PATRIOT Act passed, it would be the latest in a series of tightenings of expatriation law which began after the financial crisis started. Since 2008, if your net worth is over $2 million you are known as a covered expatriate and are now subject to an exit tax.
‘Pretend you recognise all income or unrealised gains the day before the expatriation date,’ says Alex Jones of Deloitte, who works with Americans expatriating. ‘You are treated as if you sold everything you own. If you have deferred compensation, assume it’s paid out the day before. If you have trust interests, assume they gave you your interest. Pay tax on everything or commit to withholding taxes on certain deferrals, and only then will the US accept your expatriation.’
There is an allowance of $651,000 for 2012 against net unrealised gains, but otherwise the rates of tax are normal. Because the American tax system is exclusive, ie only specified sources escape tax, anything unspecified but tax-free elsewhere, such as an ISA or a non-US pension, will be caught. (In certain circumstances those with dual nationality from birth, or below the age of eighteen and a half, can renounce their US citizenship without penalty.) This gives the lie to the hysterical rhetoric of American politicians: expatriates do not flee tax — in fact, they have to front-load it.
Not everyone thinks that the cash benefits outweigh the cost. Suzanne Reisman, an American lawyer who works in London, says that expatriation can be the resort of an ‘irresponsible’ lawyer just because ‘it facilitates planning. It’s lazy.’ It’s not cheap either: Reisman estimates that it can cost £20,000 to renounce. The ex-Americans I spoke to had not even necessarily done it to save their own money: some cited the intrusion of the American government and the fear that their spouses’ wealth in joint bank accounts could be taxed. Tricia Moon, who lives in Canada, harked back to the cry of early Americans, complaining about taxation without representation.
The renunciation itself is disappointingly simple. At your first appointment at a US embassy or consulate, you have to tell the official that you are renouncing of your own free will. At your second, sign some documents, raise your right hand and take the Oath of Renunciation (which sounds like something JK Rowling would devise). Then you must wait for the State Department grudgingly to approve your decision, consenting to the loss of a citizen and of a revenue stream.
Wealthy Americans trying to escape the grasp of the IRS may not lament the loss quite as much.
Read more by Josh Spero