Playing Chess vs. Checkers The pitfalls of renouncing one's citizenship

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by Michael Reps

     

I read with interest your recent articles on renouncing ones US Citizenship. I would like to share my observations on this topic as I assist businesses in emigrating from the US to New Zealand and the topic of renunciation of one's citizenship surfaces on many occasions.

The enormity of renouncing one's citizenship should not be taken lightly. It is my experience that a hasty divorce may lead to a new partnership that's even less desirable then the previous. Foremost in your consideration to renounce should be the sovereign powers of the new country you plan to call home.

Does that new country have a double taxation treaty with the US? Does the US have jurisdiction for enforcement for claims against tax liabilities?

Whenever I read laws and regulations that appear broad based and generalized in nature I immediately become suspicious and concerned. It is through this vagueness that I believe the courts allow for themselves latitude and room to maneuver around what on the surface appears clear, but when it comes to your day in court, and under the atmosphere of what I believe are going to be increased efforts for the prevention of capital flight from the US, I become concerned.

There are 3 words in the IRS Codes language regarding taxation under renunciation of citizenship that everyone should consider. "For Tax Purposes." It is this language that I believe many will have to navigate through in order to satisfy themselves as well as the courts of any future redress of income and penalties owed back to the US.

Below is a brief outline of the State Departments position on renunciation of US Citizenship:

Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) is the section of law that governs the ability of a United States citizen to renounce his or her U.S. citizenship. That section of law provides for the loss of nationality by voluntarily performing the following act with the intent to relinquish his or her U.S. nationality:

There are several provisions to keep in mind when making this renunciation; namely the following:

  • ELEMENTS OF RENUNCIATION
  • REQUIREMENT — RENOUNCE ALL RIGHTS AND PRIVILEGES
  • DUAL NATIONALITY/STATELESSNESS
  • TAX & MILITARY OBLIGATIONS /NO ESCAPE FROM PROSECUTION
  • RENUNCIATION FOR MINOR CHILDREN
  • IRREVOCABILITY OF RENUNCIATION

Of most importance to some may be:

TAX & MILITARY OBLIGATIONS /NO ESCAPE FROM PROSECUTION

Also, persons who wish to renounce U.S. citizenship should also be aware that the fact that a person has renounced U.S. citizenship may have no effect whatsoever on his or her U.S. tax or military service obligations (contact the Internal Revenue Service or U.S. Selective Service for more information). In addition, the act of renouncing U.S. citizenship will not allow persons to avoid possible prosecution for crimes which they may have committed in the United States, or escape the repayment of financial obligations previously incurred in the United States or incurred as United States citizens abroad.

You can gain a more detailed explanation from the US State Departments website under the topic of renouncing citizenship here.

I would encourage all who are considering this avenue to carefully read these provisions before renunciation. I would also draw people's attention to the IRS Codes 877, IRC 7701, IRC 6039G as well as Form 8854. These sources of information would be quite helpful. Most importantly, ask yourself if you believe the IRS will in the future add changes to these provisions? Could they add a provision that treated domestic US Dollars differently from overseas-sourced US Dollars?

Granted, there is an exit tax for those renouncing citizenship. And by all appearances this may mark the end of the US's ability to tax your worldwide income, but this may prove to be just one side of the coin. The bigger issues lie within the country you chose to emigrate to. For those considering New Zealand, where I operate, we exempt worldwide income on new migrants for their first four years in country. After that, your tax residency status falls under the 183-day rule and New Zealand taxes all New Zealand Based income. The US may still tax income over a certain threshold for US Citizens residing in New Zealand, but many have found that the use of trusts and corporate structuring has been more helpful in mitigating tax burdens, than has the renunciation of one's citizenship.

Also, even though New Zealand does not have an estate tax, there is no certainty that one would emerge sometime in the future. My point being, there are much easier ways to mitigate tax burdens, and those ways may not include a renunciation of one's citizenship. Again, a trust or corporate structure may be more suitable.

In other countries, where their sovereign nature is no more than a few corrupt families reigning over a sparsely populated island, I would be less optimistic that their sovereign laws will always and forever be in place to protect and defend you from confiscation of your assets should you decide to park them there. It is my opinion that their laws are only as enforceable as their interests are served. If and when the US takes a geopolitical or economic interest in a small island nation, those laws along with all of the other customs and conventions of that country, may go out the window and you may be holding a stateless passport to nowhere and a bank balance showing overdraft.

Even regarding bank secrecy law there appears to be some overreach. These laws are voluntary and statutory in nature. Just this year the Swiss and the United States governments allowed UBS to transmit to the US authorities information concerning 4,450 American clients of UBS suspected of tax evasion. Suspected, not convicted! Do you feel safer now? It is clear to me that the US is leaning toward more draconian measures especially related to extracting wealth from its citizenry.

I truly empathise with those families that have spent a lifetime working hard and saving only to have promises broken through no fault of their own. With monetary policies that appear on track to extract wealth through the stealth taxation of devaluation or inflation, I can understand the resentment building among the people I talk to on a daily basis. With a burden left for their children and grandchildren, I understand that there are greener pastures out there. But to renounce one's citizenship, may be swapping one set of problems for another.

It is far harder to leave the US and make a new life and career elsewhere than to walk into an embassy and give them a piece of your mind and your passport. If you truly want out of the US, then get out first, make a life for yourself in another country as I did 10 years ago, decide about your options to become a dual citizen, and then cut your ties if that is the most logical choice.

If, on the other hand, you can't wait and are dead set on renouncing your citizenship, "For Tax Purposes" then by all means, do yourself a favor and seek the advice of a good lawyer and accountant who specialise in overseas taxation.

Michael Reps [send him mail] is Director for YieldQwest.

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