Jackie Bugnion, Former Tax Director of American Citizens Abroad, Comments to U.S. Senate Finance Committee Request for Tax Reform Proposals: Adopt Residence-Based Taxation (RBT) for Americans Resident Overseas

One of the great anomalies in the world of international taxation is the fact that the United States is the only civilized nation in the world which taxes its citizens and long term residents on the basis of their world-wide income. This is known as CBT or citizenship-based taxation.  Everywhere else on the globe, people are taxed on the basis of where the income was earned, usually where they reside. Thus under RBT (Residence Based Taxation) people are taxed according to where they earned the money, reflecting the theory at least, that tax equity and fairness are maintained because generally, governments limit the reach of their jurisdiction by their water’s edge.

In practice, with increased IRS focus on international money and banking, citizenship based taxation has worked an extreme injustice on law-abiding Americans working abroad, because in the eyes of U.S. federal tax law, the American abroad is still required to report his income to his home country and the IRS, as well as to his newly-adopted country. Moreover, what appears to be a local bank in the eyes of most Americans abroad, is suspiciously seen by the IRS as fair game for inquiry regarding unreported income. Jackie Bugnion has been at the forefront of the fight for tax justice for Americans abroad as the tax director of American Citizens Abroad for several years and now in her individual capacity.

Founded in 1978, American Citizens Abroad, Inc. (ACA, Inc.) is a non-profit, non-partisan, volunteer association whose mission is to defend the rights of Americans living overseas. ACA works to represent overseas American interests before the Executive Branch of the US Government, the US Congress, the Federal Judiciary, and in the press.

This year, American Citizens Abroad, gave its highest award, the Eugene Abrams Award for 2017 to Jackie Bugnion. Mrs. Bugnion served on the ACA Board and Executive Committee for 12 years, from 2003 to 2015, and she was the driving force behind the promotion of Residence-Based Taxation (RBT), writing detailed RBT proposals, visiting lawmakers and giving speeches. She was instrumental in creating relationships with key legislators and the tax writing committees on Capitol Hill, and she wrote policy papers which helped establish ACA as the premier thought-leader on issues affecting the community of Americans living and working overseas.  Mrs. Bugnion participated in the team that published ACA’s anthology of short stories, “So Near Yet So Far.” The stories included in the collection are written by Americans living and working overseas and cover a myriad of experiences and issues. After publication, the book was sold to the public and copies were distributed to members of the Congress helping them to understand that Americans overseas were very much like those living in the United States and that their issues must be heard and addressed by their Representatives.

Jackie received her MBA from Harvard Business School and a BA in Economics from Cornell. She was born in the United States and later in life after graduation moved to Switzerland.

With Jackie’s express permission, we are proud to republish the below article written by Jacqueline Bugnion which was submitted to the Senate Finance Committee following the Committee’s public request for tax reform proposals.

Submission to Chairman Hatch’s request for tax reform proposals

• IRS does not recognize foreign pension funds and therefore taxes all contributions; it treats income generated over the years as coming from a PFIC fund, guaranteeing a negative return.
• U.S. legislates double taxation in the cases of the NIIT and the Additional Medicare Tax since neither allow foreign tax credits. This is particularly cynical since these taxes aim to finance U.S. medical care; Americans abroad pay into their foreign health programs and are excluded from the Affordable Care Act.
• Some countries have a wealth tax on all net assets instead of a capital gains tax on securities investments.  The U.S. taxes the capital gains, but does not allow foreign tax credits against this income.
• Definitions of what is an income tax and what is a social security tax varies enormously from country to country, with onerous tax consequences for U.S. citizens abroad.
• All OECD countries, except the U.S., have replaced sales taxes by VAT, which can range up to 20% of the price of goods and services purchased.  The U.S. does not recognize VAT paid as compensation for the U.S. tax liability, even though it does accept deduction of U.S. state sales tax.
• Entrepreneurs in countries without a totalization agreement are subject to double contributions to social security, in the foreign country and in the U.S.

• CBT tax law and related FATCA asset and revenue reporting requirements amount to a bank lockout for Americans abroad. FATCA reporting rules imposed by the U.S. on foreign financial institutions, accompanied by draconian penalties for non-compliance, strongly discourage foreign banks from accepting American citizens as clients.  In addition, the U.S. Patriot Act know-your-client requirements have effectively cut off Americans abroad from access to U.S. financial institutions. It is difficult to function without a bank account in today’s world.

• FBAR and Form 8938 reporting requirements shut off employment and investment opportunities for Americans abroad. The FBAR requirement to report bank accounts with only signature authority eliminates jobs in financial positions. Foreign employers refuse to have their accounts reported to the United States, and such reporting is illegal in many countries.  Form 8938 requires foreign companies in which an American holds 10% ownership to report this ownership to the IRS.  This measure has shut out entrepreneurial and partnership opportunities for Americans overseas.

• First, it provides relief to middle-class individuals and corrects major unfairness.
• Second, it removes impediments and disincentives for savings and investments.
• Third, it makes Americans abroad and therefore the United States more competitive in the global economy while preserving the tax base.