Americans Helping Americans Abroad

Position Papers - 2011

AARO Policy on Taxation of Americans Abroad

  1. AARO considers compliance with tax laws to be a fundamental obligation.
  2. AARO believes compliance is strengthened by simplicity and uniformity.
  3. Countries levy taxes on those resident or domiciled within their territory. The United States taxes U.S. citizens and permanent U.S. residents. Most expatriate Americans must annually file two income tax returns – one to the USA and the other to the country of residence/domicile. Tax treaties exist to avoid double taxation. However, the cost and potential confusion involved in respecting the laws and procedures of two countries adversely affects compliance.
  4. AARO is aware of the recent U.N. condemnation of Eritrea for imposing a 2% tax on its expatriates. It does not believe this to be a general denunciation of citizenship based taxation.
  5. AARO supports American Citizens Abroad (ACA) in its effort to change U.S. tax policy to one based on residence rather than citizenship, thereby bringing America into conformity with the rest of the world.

AARO Policy on Taxation of “Foreign-Earned Income”

  1. AARO believes that the United States puts itself at a competitive disadvantage by taxing the income earned by its citizens working abroad.
  2. The ability to send an employee abroad to manage, direct, instruct or train the employees of a foreign subsidiary is crucial to successful competition. Our trading partners have learned this lesson: a Chinese sent from Beijing to manage a plant in Cincinnati is not taxed by the Chinese government on his earnings. The United States does the opposite, giving the worker only the opportunity each year to exempt (for U.S. tax purposes) a fixed amount of income earned abroad (already taxed in the country where it is earned). The excluded income is still considered in establishing the U.S. tax rate on other income.
  3. AARO supports the complete exclusion of foreign-earned income from U.S. taxation. As an alternative, AARO supports an exclusion adjusted for past inflation, which would make the current exclusion over $300,000.

Recommendation made by AARO, ACA and FAWCO to Treasury in 2012 regarding a redefinition of the term “foreign” in the FATCA context

“We recommend exempting from reporting requirements “same country” accounts belonging to bona fide residents abroad. A US taxpayer resident in Australia should not have to report his or her accounts in Australia to the US Government. “Foreign” should apply only to accounts outside the US and the filer’s country of residence.

Protecting Consular Assistance: Congressional Action Needed to Ensure the Safety of Americans Abroad

Why is congressional action needed?

The Vienna Convention on Consular Relations (VCCR), a treaty fully ratified by the United States and thus part of U.S. law, ensures the right of detained foreign nationals to have prompt access to consular assistance and permits consulates to assist their citizens abroad. The United States is currently in breach of its international treaty commitments by failing to provide access to potential judicial remedies for certain domestic violations of its VCCR obligations in serous cases.

The International Court of Justice – which the United States designated as the court with jurisdiction to resolve international disputes regarding the Vienna Convention – determined in the Avena case that the United States can remedy these violations by granting judicial hearings to determine whether prejudice resulted from the failure to provide consular access. In 2008, the U.S. Supreme Court concluded in Medellín v. Texas that complying with the ICJ judgment is an international legal obligation of the United States, and that the reasons for doing so are “plainly compelling.” The Court further determined that legislation enacted by Congress is necessary to implement this obligation. Three years later, despite support from the State Department and the Department of Justice, implementing legislation has not yet been enacted.

Why is this issue important to Americans abroad?

The security of Americans abroad is clearly and directly at risk when the U.S. fails to abide by its international obligations under the VCCR and related consular treaties. Prompt and consistent compliance with consular notification and access provisions is critical to the safety of Americans who travel, live and work in other countries around the world. Whenever our fellow-citizens are arrested in a foreign country, U.S. consulates provide a list of attorneys and information on the host country's legal system, offer to contact family or friends, visit on a regular basis, protest mistreatment, monitor jail conditions, and keep the Department of State informed. The United States rightly insists that other countries grant Americans the right to prompt consular notification and access, as required under the VCCR. However, effective insistence on compliance abroad must first begin with remedial action at home.

What should congress do?

Congress must act without delay to fulfill the United States’ consular treaty obligations and thus ensure the safety of Americans abroad. Prompt Congressional action will preserve the reputation of the United States as a reliable international partner that respects the rule of law.

AARO, ACA, FAWCO and MENA believe that Congress can fulfill our international obligations by promptly adopting legislation ensuring access to the required judicial review and reconsideration of VCCR violations in the most serious cases. Any burden on the federal courts would be minimal, and would be greatly outweighed by the benefits of protecting the reciprocal rights of American citizens abroad. Each day that Congress fails to act increases the risk that other nations will begin to shirk their own VCCR responsibilities, potentially endangering the safety and security of every American citizen who ventures beyond our nation’s borders.

Unintended Consequences: The REAL Impact of the Foreign Account Tax Compliance Act

FATCA, The Foreign Account Tax Compliance Act, passed in March 2010, targets those who evade paying taxes by hiding assets in undisclosed foreign bank accounts

  • Requires Foreign Financial Institutions (FFI) to provide annual reports to the IRS, starting January 1, 2013, on the account balances and total debits and credits of any account owned by a U.S. person. The U.S. will impose a 30% withholding tax on all U.S. source transfers to non-complying FFIs
  • Requires American citizens who have financial assets held by an FFI with a value in excess of $50,000 to complete a new Form 8938 to be filed with their 2011 tax return
  • Requires any non-listed foreign company or foreign partnership with 10% U.S. person ownership to report to the IRS

FATCA Negatively impacts the economic interests of the U.S., reduces job growth and decreases exports

  • Faced with the reporting demands imposed on an FFI by FATCA and the fear that it might be deemed “non- complying” and penalized 30% of its US sourced income, many FFIs and their clients may decide to liquidate all U.S. investments. For instance, in its submission to Treasury on FATCA regulations, the Japanese Bankers Association stated very clearly: “In the event that the implementation of FATCA is not practically feasible for the Japanese financial services industry, it would result in substantial confusion in the industry and could ultimately lead the Japanese financial institutions to withdraw their investment from U.S. financial assets.”
  • Risks backlash and reciprocal laws from foreign governments Creates a major handicap for U.S. businesses in establishing foreign banking accounts for exports Cuts American businessmen off from entrepreneurial business opportunities with foreigners

FATCA Penalizes American citizens residing overseas and blocks banking access

  • Many FFIs are already refusing Americans as clients; this trend will accelerate as the deadline approaches, yet Americans cannot operate in a modern economy without access to foreign banks. Many Americans living abroad have already had difficulty maintaining US financial accounts in the absence of a bona fide address in the United States
  • Compliance will be time-consuming and costly due to the complexity of the new law and the difficulty in determining what must be reported
  • Penalties for incorrect filing are excessively harsh, even confiscatory and discriminatory

OAW Recommends

Repeal FATCA or issue a rulemaking that specifies the following:

  • Exclude U.S. citizens who are bona fide residents abroad from FATCA reporting
  • Increase the threshold for an individual’s reporting to $200,000, not $50,000, as FATCA reporting includes life insurance contracts and pension funds as well as bank accounts, or maintain the $50,000 threshold, but exclude the reporting requirement on life insurance policies and pension funds
  • Increase the reporting requirement threshold for foreign corporations and partnerships to 50% ownership by a U.S. person, not 10%
  • Institute an independent cost/benefit audit of FATCA’s impact on the IRS, Treasury and the U.S. economy

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.

Overseas Voting Reform

Americans abroad are proud of their citizenship and vigilant in guarding their constitutional right to help elect their President, Vice President and Members of Congress. For most overseas Americans, their right to vote is the primary means available to them to participate in the American democratic process. Civilian voter turnout overseas has increased steadily in recent years, and overseas Americans have historically had higher election participation rates than their stateside counterparts – typically 3+% of votes cast, although they comprise only about 2% of the electorate.

In October 2009, the landmark Military and Overseas Voter Empowerment (MOVE) Act was signed into law, bringing important changes to the voting process. Among other provisions, MOVE:

  • provides for electronic transmission of voting materials (halving the time needed by many voters to get their ballots back to be counted).
  • ensures that states send out ballots 45 days before the election.
  • prohibits states from rejecting a marked ballot solely on the basis of a missing notary signature, paper size, and other restrictions.

In the wake of MOVE, however, military and overseas voters still face a number of obstacles in casting their ballots and having them counted. Despite overall improvement in the ballot request and return process (a great majority of overseas voters used some form of electronic method to request their ballots), the Overseas Vote Foundation 2010 Post Election Voter Survey showed that close to 20% of the respondents did not receive the official ballot they expected; 16.5% received their ballot too late, i.e. after the middle of October; and confusion persists among voters and election officials as to filing requirements (e.g. witness signatures).

What still needs to be done?

Electronic transmission of voting materials / updating of registration information: Faxing should never be the only means of electronic transmission accepted, as it is a viable option for a rapidly decreasing number of voters. Voters should also be able to review and update their registration information online, reducing the risk of incorrect or outdated addresses, and to track the ballot-request and -return process online.

Witness requirements: Just as MOVE eliminated any need for notarization, which is impossible or extremely costly for many military and overseas voters, it is necessary to clearly eliminate the need for a witness signature on a ballot request or envelope. A declaration acceptable to the states should be developed to be signed by the voter acknowledging that any material misstatement of fact in completing the ballot request/ballot may be grounds for a conviction of perjury.

Postmark and date stamp requirements should be eliminated; all dated ballots should be accepted from all military and overseas voters. Postmark requirements have been eliminated for the military but not explicitly for overseas voters, many of whom prefer the speed and security of entrusting their ballots to express mail or courier services.

No election should be certified until all military and overseas ballots have been counted. No voted ballots should be required to be received before the official Election Day. In the event of special emergency elections, the period between announcement of the elections and receipt of all ballots should be uniformly fixed at 60 days.

American citizens who do not meet state residency requirements should have the right to vote in federal elections in all states and the District of Columbia at the legal voting residence of their U.S. citizen parent(s). Today, only eighteen states explicitly enable Americans who cannot satisfy state residency requirements to exercise their constitu- tional right to vote in federal elections, though some states are introducing new initiatives.

Statistical reporting is needed on the number of overseas absentee ballots transmitted and received. In order to track problems and continue to improve the UOCAVA voting process, information is needed for both military and overseas civilian voters on the number of registration applications received, the number rejected, the number of ballots requested, the number of ballots rejected and the reasons for any rejection in all cases. Funding should be ensured for the Election Assistance Commission to enable it to carry out its mission.

In addition, attempts by the Federal Voting Assistance Program to obtain a clear picture of the overseas voting population should, in the absence of any other valid count or estimate, be encouraged.

Continuing to Improve the Process

Our organizations are all original members of the recently formed Alliance for Military and Overseas Voting Rights (AMOVR), grouping overseas citizens’ advocacy organizations; state, local and federal election officials; and all branches of the military including active and retired service members and their families. The stated goals of the Alliance are to effect real change in voting procedures for UOCAVA voters before the 2012 elections and to ensure that absent military and overseas civilian voters enjoy an equal right and ability to vote.

We all also support all current efforts for the adoption of the Uniform Military and Overseas Voter Act (UMOVA) on state level. Together, we will continue to work with Congress and the Administration to find all appropriate and economically feasible ways to enhance the ability of absent uniformed service voters and overseas Americans in the private sector to register and vote absentee in U.S. federal elections.

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