Americans Helping Americans Abroad

Position Papers - 2010

US Taxes, US Exports and the Competitiveness of Overseas Americans in the World Economy

This paper is an executive summary of two in-depth OAW position papers that are available at www.overseasamericansweek.com

Taxation of Americans overseas has become patently unfair

  • Changes in US and foreign tax structures have accentuated incompatibilities between tax systems.
  • Double taxation is more severe than ever.
  • Due to the devaluating dollar, foreign currency salaries are artificially inflated when translated into dollars for US tax purposes, pushing overseas Americans into higher tax brackets.
  • The Foreign Earned Income Exclusion (FEIE) under Section 911 of the US tax code has not kept up with economic reality. If the original amount allowed in 1962 had been systematically indexed to inflation, it would exceed $250,000 today. It only stands at $91,400.
  • TIPRA legislation (2006) reduced the protection value of the FEIE.
  • The housing exclusion represents a zip-code tax lottery of overseas Americans.

US taxation of overseas Americans and foreign affiliates impeded US exports

President Obama launched the National Export Initiative in his State of the Union message of January 2010. The Administration aims to develop a coherent export policy, with a stated goal of doubling US exports in five years. But the proposals announced lack a key component – the need to encourage American companies to send US citizens to sell US goods. The second OAW position paper identifies numerous self-imposed roadblocks to increasing exports and formulated specific recommendations.

The OAW position paper fully concurs with reports prepared by the GAO and the President’s Export Council in 1978, 1979 and 1981 which substantiate the vial role played by US citizens working abroad for American corporations selling American products overseas; they systematically recommend residency-based taxation instead of citizenship-based taxation. Congress ignored these recommendations.

Specific impediments to exports identified in the position paper include the following:

  • Misguided US tax policies have increased taxation of overseas Americans, making them too expensive to deploy abroad.
  • Taxation of compensation paid to a private sector employee for expenses directly linked to an overseas post has driven expatriated staff out of the foreign job market.
  • The inadequate level of the FEIE, the stacking provision of TIPRA and the dollar devaluation have pushed overseas salaries into higher tax brackets and priced private US citizens out of the market.
  • Tax reporting for Controlled Foreign Corporations (CFC) is a nightmare; it must be greatly simplified to encourage small- and medium-sized enterprises to establish sales subsidiaries abroad.
  • To entice SMEs to export, deferred taxation of overseas sales subsidiaries must be maintained; the US tax rate on dividends paid to the parent corporation must be set at zero or at a very low rate.

OAW recommendations for taxation of US citizens overseas and Controlled Foreign Corporations

  • Increase the FEIE to $250,000 and simplify the housing exclusion under Section 911 of the US tax code
  • Exclude employer compensation for high overseas living costs from taxable salary
  • Greatly simplify tax reporting of CFCs for SMEs and overseas American entrepreneurs
  • Eliminate or significantly reduce the US tax rate on dividend repatriation from foreign affiliates.

 

U.S. Social Security Aspects of Working Abroad

Americans who go to work in a foreign country rarely focus on the long-term consequences of doing so when they accept a job abroad, although the decision can have an appreciable adverse effect on their U.S. old-age pension from Social Security. Since 1983, when the U.S. Social Security Act was amended to “remove the advantage which the Social Security benefit formula provides for persons earning substantial pensions from non-U.S. Social Security sources”, the Social Security Administration has been authorized to apply the Windfall Elimination Provision’s (WEP) offset to American’s U.S. old-age pension. This penalty reduces the retiree’s benefit check by as much as 50% of the first tier of Social Security’s “Average Monthly Earnings” for the retiree.

Our coalition of Associations representing overseas Americans have raised questions before the House Social Security & Senate Finance Committees regarding the appropriateness of the WEP offset as applied to Americans working abroad, and the fairness of such application in the absence of administrative hearings on the issue. Our arguments have not been successful. In addition, the Windfall Elimination Provision is inequitable for the retiree who stopped contributing to U.S. Social Security when he left to work abroad (when his Average Monthly Earnings were low, thus limiting his U.S. pension) and receives a foreign pension for work abroad that is not commensurate with what he would have earned under U.S. Social Security (his foreign pension often being far from “substantial”). He or she is thus doubly penalized for taking the job abroad.

Unintended Consequences

Totalization Agreements with 20 foreign countries do not adequately relieve the effect of this penalty and produce “unintended consequences”. Experience under the Totalization Agreement of one country reveals that in order to avoid the WEP by totalizing U.S. work credits with foreign ones, the American worker has to forfeit rights under the foreign social security system by taking “early retirement” before Normal Retirement Age. This requirement runs counter to policies of both foreign countries and the USA, embodied in the 2000 Seniors Right to Work Act, which encourages older workers to remain on the job after Normal Retirement Age. It also requires them to make a shrewd calculation as to when to retire so as to avoid the greater loss under one system or the other.

AARO, FAWCO and ACA have joined the Washington lobbying alliance CARE (for Coalition Assuring Retirement Equity) which representing many employee associations and is dedicated to repeal the WEP. The “Social Security Fairness Act of 2009” (H.R. 235 and S. 484) seeks to address the inequities caused by the WEP, and we join with other CARE organizations in urging Congress to support this measure.

Medicare for Overseas Americans

Medicare coverage does not extend to eligible Americans who retire abroad even though they have fully contributed to the program. There are no Medicare providers outside of the U.S., despite ample evidence that qualified care is available abroad at lower cost. Medicare-enrolled Americans must travel back to the U.S., often in poor health or suffering an acute condition, in order to receive the covered care for which they have paid.

Unlike most seniors, retired military veterans and their families living abroad do have access to covered care under the Tricare Overseas Program-Tricare For Life (TOP TFL). By statute, these military beneficiaries must be enrolled in Medicare Parts A and B, but since Medicare does not cover them abroad, TOP TFL serves as the primary coverage, reimbursing for reasonable, scheduled medical expenses incurred at host nation providers (local, private providers that have been approved by Tricare). Upon submission of proper claims, reimbursement amounts to 75% of expenses incurred.

The military’s Tricare coverage proves that administration of cross-border healthcare coverage is practicable, and thus it is clear that Medicare can operate abroad. Tricare’s program as administered by the Wisconsin Physicians Service is not only effective – it has encouraged the adoption of medical standards recognized as meeting Medicare criteria in Mexico.

Lower Costs

Americans who chose to retire abroad usually do so for either family or cost of living reasons, not to “abandon” or be disloyal to their country. The prevailing rationale in Congress holds that (1) reimbursement rates for medical services abroad are undetermined and undeterminable and likely to be very costly, and (2) compliance with Medicare standards by foreign medical facilities and personnel cannot be ensured. These objections govern the thinking of the Centers for Medicare & Medicaid Services (CMS). In practice, medical costs outside the USA are almost invariably lower, even in the wealthiest countries such as France, Germany and Switzerland. Prohibiting coverage to fully qualified Americans is costly to the Medicare program since (1) they often receive treatment anyway, by traveling back to the USA, (2) the program pays more for the same procedures due to higher healthcare costs in the USA, and (3) people tend not to access preventive medical attention in the country they are living because it’s not covered, and when the condition becomes acute, they come back to the USA where expensive operations and treatment are often needed. Costly treatments can often be avoided by early diagnosis and preventive care, which could be provided at low cost where eligible beneficiaries live.

Automate Health Care Information

The Obama Administration has already focused on the need to automate health care information, particularly patient medical records. As Americans resident overseas, we have considerable experience with different systems in Europe, and are impressed with the efficiency, security and cost savings that such automation has yielded to the health care systems of these countries. Automated records reduce the inefficiencies of duplicate paperwork, control the use of prescription drugs, track allergies and other conditions, and speed up the transfer of data for use by providers. We would welcome the opportunity to assist DHHS in facilitating such a review.

Financial Penalty

Another issue concerns the financial penalty applied to Americans who enroll in Medicare when they return to the USA after their initial year of entitlement. Overseas Americans associations contend that an American, covered by medical insurance through employment, directly or indirectly, should be able to sign up for Medicare without penalty upon return to the US, even if he does so at age 68 or 70. Since the American has not been able to draw on the program, penalizing him for late enrollment is unreasonable and punitive since it saves a negligible amount for the program.

Summary

The United States should honor its commitment to civilian Americans who have contributed to Medicare and retire outside the USA by extending healthcare coverage to eligible persons.

The methods of entitling Americans abroad to benefit from medical coverage exist – we respectfully request Congress and the Government to find an appropriate solution for the medical needs of American civilians abroad.

We ask that a Medical Research and Demonstration project be funded to provide for the collection of data about relevant medical costs and services in the market. This would provide the data needed to design a medical coverage or reimbursement programs for civilians abroad. Another possibility is the design of high-deductible insurance abroad coupled with Health Savings Accounts useful to civilian Americans on retirement abroad.

Banking Services Denied to U.S. Citizens Abroad

Bad for the U.S. Economy – Inhibiting for Growth in U.S. Exports

U.S. law, policies and regulations are resulting in Americans being denied access to basic banking services, in the U.S. and overseas.

As a direct result of existing and newly proposed U.S. regulations, many U.S. and overseas banks have closed accounts held by U.S. citizens living outside of the U.S., and many banking institutions outside the U.S. now refuse to open any new accounts for Americans. Recently enacted legislation from the Treasury and Congress will only worsen this situation.

The following five policies are severely prejudicial to U.S. citizens, to the U.S. economy, and to the United States in general.

1. Qualified Intermediary (QI) regulations

The newly reinforced QI regulations are so burdensome that banks overseas are simply closing the accounts of American clients rather than implement complex and expensive new compliance and reporting requirements. Requiring non-U.S. banks to open their files to U.S. auditors in order to verify that U.S. citizens’ accounts had been properly declared is not only a very heavy administrative burden, it is an attempt to infringe on the sovereignty of other nations, and hence many have judged these new regulations unacceptable. Banking associations from several countries have indicated their intention to simply bar U.S. citizens from doing business with them rather than attempt to comply, and indeed numerous banks have already taken steps to close U.S. citizen accounts.

We propose that these new QI regulations simply be shelved.

2. Patriot Act

The Patriot Act tightened the Know-Your-Customer (KYC) regulations, requiring U.S. banks to document the identity of their clients in greater detail. Many U.S. banks have interpreted these requirements to mean that they cannot know enough about a customer if he or she lives outside of the United States. Consequently, they are closing accounts of U.S. citizens solely on the basis of their overseas addresses.

Some U.S. citizens resident abroad have had accounts which they had held for decades summarily closed. Without a U.S. bank account, previously simple transactions such as paying U.S. taxes, settling bills and obligations, or paying children’s education expenses become complicated or even impossible.

U.S. institutions which have forced overseas Americans to close their accounts include Ameriprise, Bank of America, Citibank, E-Trade, Fidelity, INGDirect, JPMorganChase, Morgan Stanley, Smith Barney, T.Rowe Price, Vanguard, Wachovia, Washington Mutual and Wells Fargo.

We propose that U.S. law and regulations prohibit U.S. banks from refusing an American citizen customer on the basis of his or her non-U.S. address.

3. FBAR filing requirements

The FBAR filing requirements, which were intended strictly as an anti-money laundering measure, are increasingly being misused by the IRS as a tax enforcement tool. The new more inclusive Treasury FBAR filing requirements for foreign bank accounts are excessive and carry unduly harsh penalties for not filing or incorrect filing, even when this is done unknowingly. Due to the extra-territorial reach of the FBAR to bank accounts where the U.S. citizen has simple signatory authority, with no financial interest, non-U.S. companies and organizations are removing U.S. citizens from positions of signing responsibility, to protect their privacy and strategic interests from the U.S. tax authorities. Americans who have played a major role in supporting the U.S. economy and increasing U.S. exports are being shut out from international business activity because non-U.S. companies and organizations find the IRS regulations far too intrusive and even illegal under local laws.

We propose that the Treasury revert to the previous FBAR filing requirements and ensure the elimination of any requirement to report on accounts over which one has no financial interest but only signatory authority.

4. Foreign Account Tax Compliance Act (FATCA)

As a result of the recent passage the HIRE legislation which included the Foreign Account Tax Compliance Act, foreign financial institutions, foreign trusts, and foreign corporations are being required to provide information about their U.S. account-holders, grantors and owners, which will only accelerate the growing unwillingness of foreign financial institutions to accept U.S. clients rather than comply with the even more intrusive and onerous regulations. Associations of U.S. citizens living overseas estimate that the potential costs to the U.S. economy of FATCA could far exceed the $900 million annual revenue projected by the supporters of the legislation. American partnerships with foreign investors will be impeded. Foreign investment in the United States will be restrained.

U.S. policy needs to shift away from attempting to impose requirements on foreign jurisdictions, which can never be reasonably expected to accept limitations on their sovereign right to regulate their own banking industries. Instead, the U.S. should look to protect its interests and those of its citizens by implementing policies that facilitate – rather than hinder – trade and the financial transactions that support it.

5. Treasury Department General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals issued in February 2010

The assumption behind new regulations contained in this document is that any U.S. citizen who has a foreign bank account is guilty of tax evasion until proven innocent, and the Treasury Department has made no effort whatsoever to distinguish between those Americans who maintain financial relationships overseas because of residence abroad, job requirements, marital status, etc. and those who are evading taxes.

In particular, the requirement to “report certain transfers” (pages 62 to 64 of the document) effectively means that every transaction by U.S. citizens living overseas will have to be reported by the taxpayer and the financial institution holding the account; and any foreign currency amounts will have to be translated into USD at the daily rate of exchange. This requirement is not only an administrative nightmare; it unfairly attempts to impose this burden selectively on Americans based solely on where they live and bank. It is unimaginable that domestically-resident Americans would ever accept such a requirement, and hence it is not reasonable to expect overseas Americans to be any more amenable to such a proposal. Furthermore, a new reporting is proposed in addition to the enhanced FBAR requirements. On a practical basis, overseas banks will have all the more reason to refuse to maintain accounts for ordinary taxpaying U.S. citizens.

We propose that these new regulations be dropped.

Fair Credit Reporting Act

Congress must ensure that overseas Americans can access their credit history as per Paragraph 614 of the Fair Credit Reporting Act.

Conclusions

At a time when the United States needs to attract foreign capital, expand its exports, and become more competitive, these policies are discouraging investments from overseas. While there is no doubt that the United States remains a financial powerhouse, it is no longer the only option for investment purposes, and investors are already choosing to invest elsewhere.

President Obama has called for greatly increased U.S. exports; however the regulations and proposals listed herein discourage honest, hardworking, taxpaying American citizens from working overseas to fulfill this goal. Without U.S. citizens on the ground overseas to represent American exporters, the National Export Initiative will fail. This legislation is not only harmful to American citizens living and working all over the world, including those performing significant services for the U.S. Government, it is extremely harmful to the economic and financial future of the United States.

Lastly, although many legislators have the best of intentions in their attempt to catch U.S. citizens who are evading taxes, the United States is nevertheless highly hypocritical in its policies imposed on overseas citizens and institutions. In November 2009, a Financial Secrecy Index was published for the first time by the Tax Justice Network, an independent organization promoting transparency in international finance. Ranking number one in the index for banking secrecy is the U.S. State of Delaware – on a par with the Cayman Islands, Bermuda and Dubai. The Mexican government has repeatedly asked the United States to provide the names of Mexican citizens who hold accounts in the U.S. which are not declared to Mexico, but the U.S. has refused to comply, even though it is asking for exactly the same information on U.S. account holders from banks all over the world.

We strongly urge the U.S. Administration and Congress to take action now to ensure that these severely harmful policies are revised, so that U.S. citizens living abroad can have normal access to banking services worldwide, and thus continue their work on behalf of the U.S. economy and the interests of the United States in general.

Transmission of Citizenship

Due to restrictive provisions of US law, not all Americans residing abroad can transmit U.S. citizenship to their children, and since some countries do not grant citizenship to the children of US citizens who are born there, it is even possible for such children to be born “stateless” and not eligible for an American or another country's passport unless at least one American parent meets the requirements specified in the Immigration and Nationality Act.

Children born to American citizens abroad can inherit citizenship only as specified in Sections 301 and 309 of the Immigration and Nationality Act as follows:

1. Both parents are U.S. citizens and they are married: a child born abroad is a U.S. citizen at birth if either of the parents has ever resided in the United States (no amount of time specified).

2. Only one of the parents is a citizen of the United States: the U.S. citizen parent must have resided in the United States for a period or periods totaling not less than five years, at least two of which were after attaining the age of fourteen. (“Residence” in this case includes time spent abroad on U.S. military duty or employed by the U.S. government or by certain international organizations, or as the dependent of someone so employed.)

3. U.S. citizen mother giving birth to a child out of wedlock: she must have resided in the United States for one uninterrupted year at any age prior to the child’s birth.

4. U.S. citizen father of a child born out of wedlock: he must satisfy the residency requirements of Point 2, and he must also establish the blood relation, agree to support the child up to age 18 and assume legal paternity of the child before he/she reaches 18.

To facilitate transmission of citizenship and to avoid the hardships of statelessness:

American citizens should not have any residency requirement to be able to transmit nationality to his/her children, but at a minimum:

  • An unwed mother should be able to transmit citizenship to her child if she satisfies either the residence requirement provided under Point 2, or the existing requirement under Point 3.
  • The residency requirement under Point 2 should be reduced to two years.
  • The residency requirement under Point 3 should be modified from one uninterrupted year to “one year in total”.

 

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