Residence Based Taxation
Typically, Americans living and working abroad are currently paying taxes to their country of residence and to the US government; which can result in double taxation of the same income. Double taxation can be a distinct disadvantage to Americans as it can, without careful planning, increase the financial burden largely as a result of a complicated tax system known as Citizenship-based Taxation (CBT), introduced during the US civil war.
The United States is the only developed country in the world that uses CBT, which puts Americans living and working abroad at a great disadvantage when compared to other nationalities. The solution would be to use the same tax system as that used by other developed countries, Residence-based Taxation (RBT). RBT means paying tax only to the country of residence. Utilising the RBT system would eliminate complicated tax forms and reduce administrative costs for the IRS because it would provide for automatic tax collection.
There is much debate as to the impact of RBT. On one hand it is argued that it will increase US competitiveness as it will enable Americans living abroad to operate in a level playing field against other nationalities. On the other hand RBT could be used as a mechanism for US citizens to exit the US and avoid paying US taxes on balance sheets created while being a US citizen. The battle lines are drawn and are currently in the spotlight as a result of Foreign Account Tax Compliance Act (FATCA) which has made the job of being an American abroad more cumbersome. A report to the House Committee makes a case for residence based taxation, although here at MASECO we feel that further and deeper legislation will be required to force a tipping point.
MASECO Private Wealth is not a tax adviser