AmCham Hong Kong: Tax Hike Opposition

AmCham Hong Kong Joins US “Alliance for a Competitive Tax Policy”

admin — Wed, 09 Apr 2008 03:33:31 +0000

April 1, 2008, Hong Kong – The Asia-Pacific Council of American Chambers of Commerce (APCAC), together with AmCham Hong Kong and several other member Chambers of Commerce in Asia, launched a coalition in Washington today on behalf of Americans living and working abroad. The Alliance for a Competitive Tax Policy seeks to eliminate the unfair taxation of American expatriates against what has been the biggest tax increase on American expatriates in 30 years.

Rep. Meeks (D-NY) and Sen. DeMint (R-SC) are sponsors of legislation to eliminate the unfair taxation of foreign income of U.S. citizens and participated in the launch of the Alliance for a Competitive Tax Policy on April 1 on Capitol Hill. They were joined by APCAC members Tami Overby, who is President & CEO of AmCham Korea, William Oberlin, Chairman of AmCham Korea, and representatives from several prominent Washington based business associations, and the Washington tax and trade firm of Akin Gump.

The U.S. is the only industrialized country in the world which taxes its citizens on income earned internationally. U.S. citizens working abroad are taxed by both the country they live in and by the United States.

The Tax Increase Prevention and Reconciliation Act (TIPRA) of 2006 included several provisions which significantly increased the taxation of Americans working and living abroad.

Effects of Taxation on Competitiveness

The current American tax system unfairly penalizes many Americans working overseas. In many cases, as a direct effect of TIPRA changes, American working overseas are often pushed into the highest tax bracket, although their salaries and benefits remain the same. Additionally, higher marginal rates were levied on employer-provided payments reflecting the higher cost of living overseas, and the deduction for housing costs was capped at a lower level.

“Saying current U.S. tax law ’subsidises’ overseas Americans, as Senator Grassley and others do, is simply wrong. To be fair and accurate, comparison should be made between U.S. expatriates and those of other OECD countries – not to the Joneses living in downtown Des Moines or elsewhere in the U.S.,” contends Richard Vuylsteke, AmCham Hong Kong’s president.

“From a competitive viewpoint, the issue should not be whether taxes on overseas Americans are generous relative to those resident back home. The issue is whether they are punitive relative to other overseas nationals and their companies, with whom the U.S. must compete on a level playing field. Some Americans in Singapore already call TIPRA America’s ’Australian Employment Act,’ because nearby Australians are quickly filling jobs vacated by U.S. citizens with American companies and others,” he adds.

“In fairness, the American in Paris is competing against overseas nationals and their companies in Paris, and helping her or him compete should be the business of the US government,” Vuylsteke concludes.

The US tax system harms America’s competitiveness by making it even more expensive to hire Americans relative to hiring Europeans or Australians than previously. Experience has demonstrated that Americans often are the best “salespeople” for American products.

Several studies have shown a direct correlation between citizens working overseas and U.S. exports. A 2005 PriceWaterhouseCoopers study estimated that removing the cap on the foreign earned income exclusion would increase U.S. manufactured exports by US$14.4 billion supporting about 138,000 domestic jobs in the U.S.

When the Chickens Come Home to Roost

admin — Tue, 05 Feb 2008 04:37:38 +0000

WHEN THE CHICKENS

COME HOME TO ROOST

The legacy of Stanley Surrey’s Folly:

A Chronic U.S.Trade Deficit, and

A More Fragile World Economy

Dear Friends,

While many Americans struggle each day to compete in world markets on a competitive playing field that is far from level, most believe that it has always been this way and that the handicap that has been uniquely imposed on us by our own government came about for very important and probably justifiable reasons, They also think that overseas Americans have been paying this tax ever since the early days when the income tax first became compatible with the U.S. Constitution after the adoption of the 16^th Amendment in 1913. But they are mistaken.

Right from the very beginning, there was much ambiguity about whether taxing people living outside of the United States on their foreign income was even compatible with the Constitution, and this wasn’t finally decided until a decade later when a case reached the Supreme Court in 1924. Although the Court ruled that such a tax could be imposed, it made no comment as to whether such a move would be wise.

Two years later, once the Court has finally spoken and after considerable debate, the Congress decided that imposing such a tax would be a big mistake because it would severely distort the nature of competition in world markets to the great disadvantage of U.S. corporations and individual citizens. So Congress made the legislative language very clear that such a tax would not be imposed. This remained the law of the land for U.S. citizens who were bona fide residents of a foreign country throughout the period from 1926 until 1962.

Then a major change in the tax law took place in 1962 and this has wreaked havoc ever since. Given the truly bizarre origins of this new law, and the motivations of the principal sponsor of this change, it is vitally important for all of us to be fully aware of the real story behind this decision. That can be very helpful to us in building and selling the most appropriate arguments to turn this situation around once and for all.

That is why I have prepared the attached brief report, which is in an Excel format.

The intent of this document is to provide background details about why this new tax change was proposed; to identify who the prime mover was; to make clear what his real motivations and initial assumptions were; to talk about the predictions of early and later skeptics as to the probable consequences for employment and trade; and finally to include national and international statistics that seem to confirm rather clearly how devastating the consequences of this tax change really have been.

Of particular note is the analysis of this experiment that was made by the President’s Export Council in 1979 which forecast large and persistent trade deficits and substantial losses of jobs.

And indeed, one of the consequences has been that the United States has been experiencing merchandise trade deficits every year now since 1976, and the total for these 31 years of deficits aggregates to more than $ 7 trillion and just keeps growing.

The forecast of lost jobs has been proven accurate too by studies carried out by the Commerce Department and the OECD.

As the harassment of overseas Americans by their own government has become enduring and predictable, so to has been the stultification of the growth in the size of the American Diaspora and a big increase in the size of the U.S. trade deficits. As predicted, these toxic chickens have truly come home to roost.

In parallel, and related to this American trade dilemma, the world has become increasingly addicted to our self-indulgence and has so far been very willing to give us an open credit line to keep this trade deficit up and running for their own perceived advantages in employment, exports, and prosperity. But saner voices in many parts of the world are now starting to question whether this isn’t causing an unacceptable instability and systemic vulnerability in the entire world trading domain. A showdown is on its way.

* * * * *

This decision in 1962 to no longer allow U.S. citizens to have competitive equality with others in world markets came about because a bright and determined professor from Harvard Law School, Stanley Surrey, had a peculiar driving ambition of his own. He was determined to simplify the U.S. Tax Code, which for him meant the elimination of unnecessary “exemptions”. He needed an opportunity to try out this theory on a specific community that would not engender too much political opposition. Since the American Diaspora lacked any effective political power, and had no representation or sympathy back home, the overseas American taxpayer was a perfect guinea pig. Abolishing the tax exempt status of Americans living overseas seemed to be the ideal and irresistible opportunity for his tax code purification experiment.

Right from the very beginning, of course, some questioned whether this made any sense if only overseas Americans were going to be shoved off of a level playing field in world markets, and how therefore this was really going to help the United States, rather than cause economic harm. But for Professor Surrey, the economic consequences of his experiment were not really what mattered. This was to be an experiment in the purification of the tax code.

Today, more than four decades and trillions of dollars of deficits later, many now view Surrey’s theory as Surrey’s folly. But this experiment is still up and running and there is surprisingly little opposition in the halls of Congress or any subsequent Administration to continuing it. Indeed, as one famous Senator from Iowa recently concluded, the tax on those living and working abroad is still far too lax and therefore needs to be made even more vigorous rather than diminished.

And the greatest of all ironies, of course, is that rather than simplifying U.S. tax rules, which was Professor Surrey’s alleged original goal, his experiment has actually brought about the birth of several new dimensions of ambiguity and multi-currency conversion standards that have helped make the U.S. tax code one of the most complex and essentially incomprehensible tax systems the world has ever seen.

Facing up to the economic harm to the United States that has been caused by Stanley Surrey’s folly is an intrusion of reality that is still not popular in Washington. Aggressive rebuttals are made by many in high places in every administration and every new Congress, and even when strongly persuasive data can be assembled, this is usually swatted away as “anecdotal” ephemera and not therefore really acceptable as a justification for a major change of course on this issue.

This sobering reality is another reason why it seemed opportune, in preparing the attached report, to go right back to the beginning to try to make very clear how this strange law came to be enacted as a project to purify the tax code, to emphasize once more what the initial assumptions and arguments in its favor really were, and to show statistically what has happened since then.

All of the rational and statistical evidence since 1962 suggests that Professor Surrey’s experiment has been a very costly mistake. The result has very clearly been to force the American Diaspora off of a level playing field into a world of unique competitive disadvantages, thereby conceding great and unnecessary privileges to competitors of every other nationality. This has caused great harm to every citizen of the United States, and has also made the entire world trade systems much more vulnerable than it should be.

We know from bitter experience that it is still heroic today to imagine that reason alone could ever be sufficient to bring this experiment to an end. It is equally utopian to believe that those who have been responsible for imposing and defending this folly will easily admit that it was never the right thing to do.

Nevertheless, it is most important for all of us to continue to unite our voices and join together to call with clarity and eloquence for an end to this absurd experiment as soon as possible.

I look forward to hearing from you and sharing your ideas on how we can end this folly, and rejoin the real world on comparable competitive terms as quickly and efficiently as possible.

Take care and all the very best,

Andy Sundberg

Secretary

The Overseas American Academy

Geneva, Switzerland

Tel: 41-22-792 1659

Mob: 41-79-203 8621

Email: andy@sundberg.com

GRASSLEY AND TAXATION: DO YOU HAVE THE RIGHT TO REMAIN SILENT?

admin — Mon, 26 Nov 2007 02:00:58 +0000

On Sept. 25, 2007 the Wall Street Journal published an article “Uncle Sam’s Long Arm” which reported on the updated housing cost limitations for tax reporting overseas Americans http://online.wsj.com/article/SB119066894637637834.html?mod=article-outset-box. The Wall Street Journal cited Senator Grassley (R-Iowa) a long time opponent of tax relief for overseas Americans and wrote, ” At the time [of the passage of the Tax Increase Prevention and Reconciliation Act - TIPRA], Mr. Grassley characterized the change in the law as a matter of fairness. Instead it’s helping to drive Americans out of work.”

On October 3rd, 2007, the Wall Street Journal published a rebuttal letter from Senator Charles Grassley entitled ” Americans Abroad Should Be Taxed”

http://www.aca.ch/grassley.htm . Senator Grassley concluded the letter by saying, “An American in Peoria can’t exclude any salary or housing costs from taxable income. Why should an American in Paris not face reasonable limits?”

Senator Grassley (R-Iowa) is Ranking Member of the Senate Finance Committee and member of the Joint Committee on Taxation. Over a thirty year career in Washington, he has systematically advocated increasing taxation of Americans overseas and attacked Section 911.

ACA was quick to respond with its own rebuttal letter to both the Wall Street Journal and Senator Grassley http://www.aca.ch/taxltrs.htm . In addition, ACA received numerous copies of letters sent by overseas Americans to both the WSJ and Senator Grassley http://www.aca.ch/taxltrs.htm rrebutting Senator Grassley’s view of the tax situation for Americans working overseas.

The Wall Street Journal published an excellent response from Jack Maisano in Hong Kong in which Mr. Maisano corrected several of the senator’s comments and concluded by stating; “Americans abroad pay local taxes, as do foreigners living in the U.S. And then they pay taxes a second time to the U.S., for public services and public educations for their children that they do not receive. Harmonizing everyone to the U.S. standard does nothing for U.S. competitiveness, and puts the U.S. at a global disadvantage in terms of jobs, influence, market information, exports and growth. It’s time to take a fresh look at America’s counterproductive tax policies with regard to U.S. citizens living abroad.” http://www.aca.ch/maisano.htm

Senator Grassley’s letter to the Wall Street Journal has provoked people into responding. ACA strongly urges members and supports to add their voices to the chorus of this very important issue. Write Senator Grassley directly and your Congressman (women) and Senators http://www.congressmerge.com. It is through letters of individual argumentation reflecting the broad consensus that we can demonstrate that the current system of double taxation is not only unfair to overseas Americans, but is also damaging to the U.S. economy. Please send ACA copies of the letters you write to your government representatives so that we may add them to our website, www.aca.ch.

We thank you in advance for your support.

–
ACA
5 Rue Liotard
1202 Geneva, Switzerland
0041.22.340.02.33
info.aca@gmail.com

ACA is a nonprofit, nonpartisan, nongovernmental association dedicated to serving and defending the interests of individual US citizens living worldwide. Our headquarters are in Geneva, Switzerland but our members come from all corners of the world. If you would like to support ACA please visit our website, www.aca.ch, and join our efforts by becoming a member.

Letter to the Editor, Wall Street Journal

admin — Fri, 26 Oct 2007 07:31:38 +0000

Dear Editor,

Sen Chuck Grassley, in his letter to the WSJ on US tax policy regarding Americans living abroad, makes some points that need clarification:

1.   Federal taxation on the salaries of Americans started in 1913, but it was abated for Americans living abroad in the 1920s in order to spur exports.   Protecting US citizens abroad from US taxation supported the US export effort then, and it would do so now as well — if taxes on Americans living abroad were eliminated.

2.   Neither the House Ways and Means Committee nor the Senate Finance Committee approved the idea of reducing tax benefits to overseas Americans. These reductions were added only at the last minute in the Conference Committee in a midnight deal without any opportunity for public comment. It was particularly appalling that these tax increases on overseas Americans were retroactively applied to the beginning of 2006.

3. Treasury would not have to be involved in assessing housing deductions for hundreds of different cities around the world if the law had not been changed.

4. The issue should not be whether taxes on overseas Americans are generous relative to those living in the US. The issue is whether they are punitive relative to other overseas nationals and their companies with whom the US needs to compete on an international playing field. The whole world is not Iowa.

5. Congress’s limits on housing deductions may be objective, but given the realities of overseas living costs, they are not reasonable. Worse, they impact the most senior executives whose decisions have wide-ranging influence on hiring and purchasing. Putting English-speaking non-Americans in these positions — by making American executives uncompetitive — hurts US exports and that is precisely what is happening in US corporations around the world.

6. The “sizeable” exclusion may look generous from a US perspective — where you can deduct mortgage interest, go to public schools, buy cars at the world’s lowest prices, and visit grandma by driving down the road. But overseas, costs are higher — much higher. And all of the benefits that may be provided by an employer to cover private schooling, for example, are both monetized and taxed. It is possible for a person to have a higher tax bill than cash salary. That is illogical and “unfair” to use the Senator’s rationale.

7.   The statement that current law “subsidizes” overseas Americans is wrong. To be fair and accurate, the comparison should be between overseas citizens of the US against overseas citizens from other OECD countries — not to the Joneses living down the street in the USA. The governments of Germany, the United Kingdom, France, Sweden, Australia, Austria, Italy, Japan and every other country in the world (with the notable exceptions of Eritrea and North Korea) do not believe they are subsidizing their overseas citizens when they do not assert taxing jurisdiction over them. What makes the USA so unique that we must punish our overseas citizens with punitive rates of taxation that no other national must endure? More importantly, what makes it so uniquely rich that we can afford to drive down our countrymen’s access to the jobs exports create at home and abroad in a globalized world market?

8. If we are talking about inflation, how about going back to 1977 when Section 911 was working more effectively — and before it was eviscerated by the 1978 Congress. If we used those numbers, then both the salary and the housing exclusions should be approximately double the current amount. Without that adjustment, the numbers are not realistic in today’s world. So if inflation is being considered, let’s start at the beginning.

9. In fairness, the American in Paris is competing against people — especially overseas nationals and the companies they work for – in Paris, not with people in Des Moines. That would appear to be common sense.

Americans abroad pay local taxes, as do foreigners living in the US. And then they pay taxes a second time to the US, for public services and public educations for their children that they do not receive. Harmonizing everyone to the US standard does nothing for US competitiveness, and puts The US at a global disadvantage in terms of jobs, influence, market information, exports and growth. It’s time to take a fresh look at America’s counter-productive tax policies with regard to US citizens living abroad.

Jack Maisano

Letter from the American Citizen’s Abroad:

admin — Fri, 26 Oct 2007 06:13:17 +0000

Senator Grassley is Wrong about Taxation of Americans Overseas

In his letter of 3rd October 2007 to the WSJ “Americans Abroad Should Be Taxed”, Senator Grassley falsely states that Americans overseas are granted a tax “subsidy”. In fact, Tax Code Section 911 merely aims to mitigate the double taxation burden faced by Americans working overseas. They must first and foremost pay taxes in the country of their residence and on top of that file and pay taxes to the United States. They have to deal with inherently incompatible tax systems and social security systems as well as high consumption taxes. Furthermore they have to assume a foreign exchange risk when they translate their foreign currency incomes, assets and liabilities into US dollars for tax purposes. A stable income of EUR 100,000 was taxed at USD 100,000 in 2001 but would be taxed at USD 142,000 in 2007.

Contrary to the opinion of Senator Grassley, foreign tax credits simply do not prevent double taxation of Americans residing overseas; the proof is that Americans overseas pay several billion of dollars in taxes every year to the United States.

The US is the only major industrialized country that taxes its citizens residing overseas, thereby rendering them uncompetitive. Ask the personnel department of any major US multinational corporation, and they will confirm that they have reduced the number of their American employees overseas and prefer hiring foreigners for posts abroad simply because US taxation makes Americans too expensive to employ. Among all OECD countries, the United States has the smallest percentage of its native born population living abroad in other OECD countries.

Senator Grassley talks about “fairness” with a political eye oriented to the taxpayer in Des Moines. But here he misses the entire point and misleads the nation. The issue should be to have a US tax policy which helps the nation’s competitiveness in the global economy.

The US has a chronic, unsustainable trade deficit, close to 6% of GDP, or about $100,000,000 per hour, all of which is borrowed abroad, mostly in China and the Middle East. Over the last twenty years, American exports have simply not kept up with the growth of world exports. One of the reasons for this trade gap is that the number of Americans working overseas for American companies has been cut in half. And the tax burden on overseas Americans greatly discourages American entrepreneurs and small and medium sized companies from setting up foreign sales subsidiaries. If American managers do not have first hand experience and knowledge of foreign markets, they are not able to take full advantage of new market opportunities opening up worldwide.

Intelligent US tax policy would give priority to reducing the trade deficit. It would lower corporate tax rates, which are now among the highest in the developed world, to favor domestic production; it would reduce the administrative and tax burden on Controlled Foreign Corporations; it would encourage, rather than discourage, Americans to go abroad to sell American products.

Sincererly,

American Citizens Abroad

Antarctica Workers Frozen Out of U.S. Tax Break

admin — Fri, 26 Oct 2007 06:07:28 +0000

By Ryan J. Donmoyer and Alison Fitzgerald

Aug. 15 (Bloomberg) — Antarctica may be a great place to avoid the heat and the crowds. For U.S. citizens living there, one thing can’t be avoided: taxes.

The U.S. Tax Court ruled that the approximately 1,100 workers at the Amundsen-Scott South Pole Station, McMurdo Station or other areas on the southern continent don’t qualify for a longstanding exemption for Americans living abroad.

At issue in the tax cases is whether Antarctica qualifies as a foreign country for purposes of a 50-year-old law that allows Americans living abroad to exclude part of their income from U.S. tax. Most of the cases date to 2001 and 2002, when the exclusion amount was capped at $80,000; the amount is now indexed for inflation and was $82,400 in 2006.

“As Antarctica is not a foreign country for purposes of the code, we conclude that petitioner is not entitled to exclude the wage income he earned in Antarctica,'’ Judge Juan F. Vasquez wrote in one of 15 cases with identical rulings released in the last month.

As far back as the 1960s, U.S. tax courts have held that Americans working in Antarctica must pay taxes as if they were in the continental United States, Vasquez said in his ruling. Tax regulations classify work in Antarctica as “space or ocean- related'’ activity.

Taxed Everywhere

The U.S. generally taxes citizens on their worldwide income. To qualify for what is known as a Section 911 exemption, U.S. citizens must live outside the country for an entire tax year, or 330 days in any 12-month period. U.S. citizens are required to pay taxes in the country where they are living.

The IRS decision particularly vexes some Raytheon Co. workers who also filed claims in labor court demanding overtime pay. That court ruled that Antarctica is a foreign country, and is therefore not subject to the U.S. Fair Labor Standards Act.

“There can be no disagreement over the proposition that Antarctica is `foreign’ to the United States,'’ the 2004 ruling by U.S. District Judge Joseph Tauro said. That case cited an earlier Supreme Court ruling that said the “ordinary meaning of `foreign country’ includes Antarctica, even though it has no recognized government.'’

“So, according to U.S. law, Antarctica is not a foreign country, allowing taxes to be collected. But Antarctica is a foreign country when it comes to giving Raytheon a break in labor costs,'’ said Nicholas Johnson, who was a party in both lawsuits. Johnson says he’s returning to Antarctica tomorrow for another year of work.

Territorial Claims

Seven countries — the United Kingdom, New Zealand, Australia, Norway, Chile, France and Argentina — have made territorial claims in Antarctica, said Christopher Joyner, a government professor at Georgetown University who has written several books about Antarctica. None have been recognized by any other country.

In 1959, 12 states agreed in a treaty to use Antarctica only for peaceful purposes. Since then, 33 other nations have signed on. Since there is no recognized government, no taxes are levied in Antarctica.

The cases were almost all filed by Colorado residents working for Raytheon Support Services Co., under contract with the National Science Foundation at McMurdo Station on Ross Island in Antarctica.

Larry D. Harvey, an Englewood, Colorado, attorney who filed about 160 of the cases, said he was disappointed by the courts’ rulings.

“I thought we had reasonably good arguments,'’ he said in an interview.

The cases have parallels to a batch filed by Raytheon employees earlier in the decade who had worked on Johnston Island, a 591-acre, U.S.-owned South Pacific atoll located about 700 miles southwest of Hawaii.

Courts ruled against those workers.

To contact the reporters on this story: Ryan Donmoyer in Washington at rdonmoyer@bloomberg.net ; Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net

Last Updated: August 15, 2007 15:56 EDT

American Citizen’s Abroad - Overseas Americans Week

admin — Fri, 26 Oct 2007 06:01:41 +0000

Read all about American Citizen Abroad’s (ACA) participation in the 2007 Overseas Americans Week held in Washington, D.C. this past June. Once again ACA is hard at work serving and defending the interest of American Citizens living worldwide .

Americans Abroad Caucus	Promoting the Americans Abroad Caucus was the key focus of OAW 2007. The Caucus was launched with great success and celebrated at a cocktail party organized for current and prospective members of the Caucus and their staffs, covered by the International Herald Tribune. During OAW, numerous members of Congress either joined the Caucus or expressed an intention or interest in doing so. Several fruitful discussions were held with various members of the Caucus.
7 days in June	Overseas Americans Week 2007 included all five days of the week of June 18^th and the first two days of the week of June 25^th. Twenty-five representatives of American Citizens Abroad (ACA), the Federation of American Women’s Clubs Overseas (FAWCO), the Association of Americans Resident Overseas (AARO), Democrats Abroad and Republicans Abroad made up the total delegation . We owe a big thanks to these volunteers who paid their own travel and lodging expenses and gave their time to promote the interests of Americans residing overseas.
84 meetings held	Eighty-four meetings were held in Congressional offices and research institutes. Many meetings were organized to include staffers of several Congressional offices from a particular state; hence the outreach on the Hill was even more extensive. Particularly intensive contacts were made with offices of representatives from Ohio, South Carolina, Connecticut, Maryland and Idaho. Other than Congressional offices on both sides of the Hill, appointments included the National Foreign Trade Council, the Urban Institute, the American Chamber of Commerce, AARP, the National Association of Secretaries of State, the US-Mexican Chamber of Commerce, the United States Council for International Business, the Peterson Institute of International Economics, Program Manager of the Foreign Resident Compliance office of the IRS, the Consular section of the State Department, the Federal Voting Assistance Program and the Election Assistance Commission.
Key issues	The meetings touched on the key issues of concern to Americans living abroad – Voting Procedures and Voting Rights, Citizenship, Medicare, Social Security and Taxation.
Registration and Voting	On the voting issues, we anticipate progress as we learned that legislation is soon to be introduced into Congress proposing to amend the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA) to ensure that registration and voting forms downloaded from the internet will be accepted by the State voting offices and to allow Americans who have never resided in the United States to vote in the last place in which their parents were domiciled before leaving the United States. We look forward to working with the Americans Abroad Caucus to support this legislation when it comes forth.
Children’s citizenship	Citizenship is another issue where we hope the Caucus can play a positive role. Today, it is possible that a child of an American citizen born overseas will not be able to obtain American citizenship, due to the residency requirement for his parent(s). All Americans should enjoy the same right to transmit US citizenship to all of their children at birth, including all children born to or adopted by a US citizen abroad.
Social Security and WEP	The concern with Social Security is that the Windfall Elimination Provisions (WEP) section of the Social Security law penalizes overseas Americans simply because they also receive a foreign source pension. Fortunately the Social Security Fairness Act of 2007 was introduced in January 2007 in both the House ( H.R. 82) and the Senate (S. 206) with a substantial number of co-sponsors. This act, if passed, would eliminate the WEP from the Social Security Act and would solve one of the key discriminatory issues faced by Americans who have contributed to US Social Security and who have worked overseas.
Medicare	Medicare is not available to Americans in foreign countries. Americans abroad who are eligible for Medicare benefits in the US should be able to receive equivalent benefits while abroad. In several meetings, OAW delegates highlighted the fact that enabling Medicare benefits overseas could in fact represent a cost savings to the Medicare system, as medical treatment in the US is far more expensive than elsewhere in the world.
Defending Section 911	On the taxation issue, meetings were held with staffers of many members of the Ways and Means Committee, the Finance Committee and the Joint Tax Committee. In the context of PAYGO in Congress today, there is a danger that legislators seeking revenue compensation measures may attack Section 911 once again. Therefore, we must both push to protect the existing foreign earned income exclusion and attempt to have the cap on the exclusion eliminated. To do so, it is important that we make members of Congress and their staffers understand that these reforms are in the best interest of their constituencies, not just abroad, but back home as well. Facilitating American companies’ ability to send workers abroad to promote products produced in the United States and exported overseas is good for jobs back home and important for the U.S. economy.
Tax reform	Several meetings reconfirmed the fact that general tax reform would not come back on the table until 2009 at the earliest. Many consider that all tax laws – corporate and individual – which touch on the international field are in need of major reform. Organizations representing overseas Americans will continue to work with their contacts in Congress and in various research institutes to make our cause heard in this general reform context.
Synergy for the cause	OAW delegates are convinced that their coming to Washington once a year to exchange information with staffers and to present our point of view is not only necessary but highly useful. Through our efforts, the Americans Abroad Caucus is becoming a reality and will be an important forum for spreading the word on our issues. Many staffers thank us for our educational effort. And OAW provides the opportunity for members from the various overseas organizations to meet one another and to create synergy for the cause.

American Citizens Abroad: Letters

admin — Wed, 28 Feb 2007 03:18:38 +0000

February 7, 2007

Mrs. Jacqueline Bugnion

Mr. Andrew Sundberg

American Citizens Abroad

5 Rue Liotard

1202 Geneva, Switzerland

Dear Jacqueline and Andy,

Thank you for your letter regarding the reintroduction of the Working American Competitiveness Act. I am an original cosponsor of this bill.

American expatriates working abroad are some of our country’s best unofficial ambassadors. They promote American business, showcase American values, and cultivate American interests in foreign countries.

During the 109th Congress, I was a cosponsor of S.3496, the Working American Competitiveness Act, which would exempt all foreign earned income from taxation. This legislation would bring the United States into line with almost every other developed nation in the world — the people with whom Americans are competing for jobs. Congress should not unfairly tax American citizens who work abroad.

I understand that Senator Jim DeMint (R-SC) will reintroduce this legislation later this spring. When he does, I will join him as an original cosponsor. I will continue to work with my colleagues in Congress to make sure that U.S. citizens abroad can compete on a level playing field with foreign nationals.

Best wishes,

Sincerely,

Chuck Hagel

* * * * *

January 18, 2007

The Honorable Chuck Hagel

Senator from Nebraska

United States Senate

Washington, DC 20510

Dear Senator Hagel,

American Citizens Abroad is a non-profit, non-partisan association representing the interests of private American citizens residing abroad. We are addressing the entire Ohio delegation to the 110th Congress to alert you to an issue which directly concerns Ohio, one of the nation’s principal export states with a high proportion of jobs related to foreign trade.

U.S. taxation discriminates against Americans working and residing abroad. This has been the case since the 1960’s, but has been made a lot worse by the recent tax increases imposed on overseas Americans under Section 515 of the “Tax Increase Prevention and Reconciliation Act of 2005″ (TIRPA) enacted in May 2006.

U.S. taxation of overseas Americans penalizes the overall American economy in two ways:

It strongly discourages American as well as foreign companies from hiring Americans for overseas employment; as such, it clearly limits the employment opportunities overseas for American citizens; in fact the number of Americans working for American companies overseas has been cut in half over the past twenty years, and this trend will accelerate with the law enacted in May 2006.
Employment within the United States, more directly in export oriented industries and services, but also generally in the overall economy, is undoubtedly and substantially affected by the overseas presence of fellow citizens representing the vanguard of our international trade. Fewer Americans overseas translates over a period of time into lower exports and reduced overall economic activity and employment at home.

For this reason, we ask the members of the Ohio Congressional delegation to work together in bi-partisan collaboration to support four issues related to the taxation of Americans working overseas:

Request an update of the GAO report ID-81-29 (issued in 1981) entitled “American Employment Abroad Discouraged by US Income Tax Laws”.
Call for Congressional hearings on this issue of taxation of overseas Americans.
Introduce legislation for an immediate repeal of Section 515 of TIRPA.
Support more fundamental tax reform for Americans working overseas by backing the Working American Competitiveness Act initially introduced in the 109^th Congress (S-3496; H.R. 5986).

As this is a complex issue and one not known to many in Congress, please find enclosed a summary note providing background information and the reasons why the law needs to be changed.

Thank you for your consideration. Please do not hesitate to contact us at American Citizens Abroad should you have any questions – info.aca@gmail.com.

Sincerely yours,

Jacqueline Bugnion, Director

Andy Sundberg, Founder and Director

admin — Tue, 27 Feb 2007 08:16:08 +0000

American Citizens Abroad - Position Paper

admin — Tue, 27 Feb 2007 08:13:21 +0000

Stop killing the goose that lays the golden egg

Stop the double taxation on Americans working abroad

The United States is the only industrialized nation that citizens on a citizenship and residence basis. This means that it is only Americans working and residing overseas who are subject to taxes both in the country of residence and their country of citizenship. Section 911 of the U.S. Tax Code allows for limited foreign earned income exclusion and housing cost exclusion. These exclusions along with the application of tax credits for foreign taxes against U.S. taxes alleviate somewhat the double taxation, but do so only partially.

Historical Background

Since 1962 when Congress first introduced the concept of taxing the earned income of non-resident U.S. citizens and established a limited exclusion of part of foreign earned income double taxed by the U.S., the issue has been a political football. Section 911 has been regularly subject to attack by certain members of Congress. Some have referred to Section 911 as a “subsidy” to or a “tax break” for Americans residing abroad, when in fact its purpose is only to partially mitigate the double taxation to which overseas Americans are subjected. Very briefly, here are the key highlights of this tumultuous history:

Prior to 1962, the U.S. like all other industrialized nations, did not double-tax the income of its citizens resident abroad.

In 1962, the amount earned abroad and excluded from U.S. income taxes was limited to $20,000 a year, rising to $35,000 after three years abroad.

In 1964, the exclusion was limited to $20,000 a year, rising to only $25,000 after three years abroad.

In 1974 and 1975 the House Ways and Means Committee attempted to double tax all foreign source income by abolishing the foreign earned income exclusion, but without success.

In late 1976, Congress successfully and retroactively to January 1, 1976 amended the tax law so that the overseas earned income exclusion would be reduced to $15,000 (off the bottom). No foreign tax credit would be allowed for taxes paid abroad on excluded income. Following voluminous complaints from American companies employing Americans overseas and from overseas Americans who could not survive under the fiscal weight resulting from the 1976 Tax Reform Act, Congress postponed the effective date from January 1, 1976 to January 1, 1977.

In 1978, Congress voted for a total elimination of overseas earned income exclusion to be replaced by specific deductions including excess foreign housing costs, educational costs for children and cost of living.

In 1979, the President’s Export Council issued a report to the President, dated December 5, which starts with the following sentence. “The Executive Committee of the President’s Export Council has asked me to express its strong concern over the adverse effects on exports of the present rules (Section 911 and 913) concerning taxation of foreign earned income of Americans living overseas.” It stated that “Americans are being taxed out of competition in overseas markets. The result is a sharp loss in the U.S. share of overseas business volume in vital economic sectors. The current situation contributes to our negative balance of payments, a loss of U.S. jobs to competitors and the decline in the U.S. presence and prestige abroad.” It recommended “…enactment of a new tax law to put Americans working overseas on the same tax footing as citizens of competing industrial nations.”

In 1981, Congress recognized that replacing the earned income exclusion with deductions had aggravated rather than alleviating the problem; it introduced a $75,000 maximum for foreign earned income exclusion from double taxation for physical presence and bona fide residents abroad; the exclusion cannot exceed the actual salary earned. Also introduced was an additional deduction or exclusion for excess cost of foreign housing. There were no provisions for deductions for educational costs for dependent children, who for reasons of language or religious laws are often not accepted to study in public schools of foreign countries and therefore are obliged to attend more costly English language private schools in order to transfer back to a U.S. school or to qualify upon graduation for entrance into a U.S. college or university.

In 1981, the General Accounting Office issued a report to Congress ID-81-29 entitled “American Employment Abroad Discouraged by US Income Tax Laws”, concluding that the 1978 law created a “disincentive to employment of U.S. citizens abroad and, therefore, adversely affects exports,” that employer tax reimbursements of U.S. citizens abroad “makes them substantially more expensive than 3^rd country nationals” and that “Congress should consider placing Americans working abroad on an income tax basis comparable with citizens of competitor countries who generally are not taxed on their foreign income.”

In 1986, Congress reduced the maximum foreign earned income exclusion in Section 911 to $70,000: separate foreign tax credit limitations were introduced for passive income. The new law also limited foreign tax credits for alternative minimum tax purposes to 90% of the alternative minimum tax before credits.

In 1988, Congress through the Technical and Miscellaneous Revenue Act of 1988 eliminated the marital deduction for property passing upon death from a U.S. citizen to a non-U.S. citizen. An annual gift tax exclusion of $100,000 was introduced for gifts to non-U.S. citizen spouses.

In 1992, Revenue Ruling 90-79 provided that an exchange rate loss on a foreign currency mortgage could not be used to offset an exchange rate taxable gain on the sale of a house in a foreign country, even if the mortgage was used to finance the purchase of the house.

In 1997, Congress increased the maximum foreign earned income exclusion by $2,000 per year (from 1998 to 2002) to a new maximum of $80,000.

In 2004, Congress removed the 90% limit on foreign tax credits for AMT which had been introduced in 1986. Once again, 100% of foreign taxes paid could be credited against tax arising from AMT calculations in the United States.

Current Status

In May 2006, Congress passed a significant tax hike on overseas Americans in the “Tax Increase Prevention and Reconciliation Act of 2005” (TIRPA).

With the passage of TIRPA, the unfavorable tax situation for overseas Americans has become significantly worse. Section 515 of TIRPA “Modification of exclusion for citizens living abroad” under “Title V Revenue Offset Provisions” specifically aims to increase taxes on overseas Americans.

Section 515 raised the maximum foreign earned income exclusion from $80,000 to $82,400.
But simultaneously introduced a low annual cap of $11,536 on the exclusion for foreign housing costs. This cap is determined by subtracting a housing cost floor (rent which would be considered a normal base rent not excludable) from the actual rent cost which can be a maximum of 30% of the $82,4000 foreign earned income exclusion allowed, or $24,720. The housing cost floor is set at 16% of the foreign earned income exclusion allowed, i.e. $13,184. Hence, the maximum net housing exclusion allowed is the difference between the maximum actual rent cost and the housing cost floor, or $11,536. Prior to this, “reasonable housing costs” without a cap were excludable.
Nevertheless, the law states that the Secretary of the Treasury may issue regulations or other guidance providing for the adjustment of the percentage of the actual rent cost limit. In fact, this allows the Treasury department to establish a list of cities of exception considered to have rents exceeding $24,720.
Section 515 also pushed overseas Americans into higher tax brackets by a stacking measure which requires that the tax rate applicable to taxable non-excluded income be determined by adding back the excluded income under Section 911 to the taxable income. Previously, the tax rate applicable to non-excluded income was determined only by the amount of the taxable income.
Furthermore Section 515 was enacted in May 2006 with retroactive effect to January 1, 2006.

The cumulative affect of these measures is that many Americans living overseas will see their 2006 U.S. tax bill double or triple, or increase in by even more, as compared to 2005. It is forcing more Americans overseas to return home, particularly middle income families living in high rent, low tax countries. Its clear consequence is for U.S. corporations to cut back even more on American overseas staff.

Double Taxation Discriminates Against Americans Working Overseas

Intentionally or otherwise, current US tax policy concerning Americans residing overseas penalizes Americans who work overseas. Furthermore, it forces American companies to employ non-U.S. citizens for key overseas assignments. U.S. double taxation of Americans working overseas, in addition to the taxes paid in the country of residence, simply makes American citizens too costly. This double-taxation denies U.S. citizens an equal opportunity to compete for jobs abroad. In today’s highly competitive world market, long gone is the time when American companies could afford to employ American citizens overseas irrespective of costs. Over the last twenty years, the number of Americans working overseas for Americans corporations has been cut by more than half, according to published Commerce Department data. This is a very dangerous trend clearly foreseen in the President’s Export Council Report in December 1979 and in the GAO 1981 Report to Congress ID-81-29. It is particularly dangerous when globalization of the world economy is accelerating and American presence in international markets is ever more important to combat the serious shortfall of American exports that is causing unsustainable trade deficits. The tax hike on overseas Americans passed in May 2006 within the framework of TIRPA seriously accentuates the penalty on Americans overseas.

For Americans to be competitive when working overseas, they must cost no more to their employers than either qualified local or expatriates from other countries. At the same time, they must be able to have a standard of living comparable to that of their foreign colleagues with equal rank, skills, experience and responsibility. With U.S. tax rules in place, Americans in countries with low income tax or no income tax, such as the Gulf countries or Hong Kong, find themselves in the dilemma of either having to accept a sub-standard of living compared to foreign nationals because they are the only ones with fiscal obligations to their country of citizenship or of being paid wages over the general market because of their U.S. citizenship to maintain the same standard as their foreign competitors, which is an illegal alternative in countries prohibiting salary discrimination based on nationality or national origin. It is not surprising that Lissa Redmiles, an economist with the Special Studies Returns Analysis Section of the IRS writes the following in the Statistics of Income Studies of International Income and Taxes. “One noticeable shift however is the steady decline of foreign income earned in Saudi Arabia. In 1987. some 13,407 U.S. individuals living in Saudi Arabia reported almost 10% of the total foreign-earned income. In 2001, 7,449 such individuals earned 3 percent of the total foreign-earned income.”

A Vital Issue for the Nation’s Competitiveness

Although taxation of overseas Americans concerns less than one quarter of a one percent of all U.S. tax filings, it is an issue of vital importance for the nation’s competitiveness. Employment within the United States, particularly in export oriented industries and services, is undoubtedly and substantially affected by the overseas presence of fellow citizens representing the vanguard of our international trade. Already in 1979, the Report of the President’s Export Council noted that the employment of foreigners instead of American citizens “has brought about a sharp loss in the U.S. share of overseas business volume in vital economic sectors, largely because third party nationals tend to specify and order equipment from sources they know and trust in their home country, whereas American citizens would specify and order U.S. equipment with which they are most familiar.” They cite, in particular, a dramatic drop in total contracts in the Mid-East from over 10% to less than 2% of the market in just one year, following the change in fiscal status of Americans overseas and the subsequent repatriation of Americans. The GAO reached an identical conclusion with its 1981 report, ID-81-29, entitled “American Employment Abroad Discouraged by US Income Tax Laws”.

Americans overseas are our nation’s first line ambassadors and play an important role as strategic decision makers for investing overseas and for expanding U.S. exports while identifying overseas market trends and business opportunities. As our nation’s tax policies impede the free movement of Americans working overseas, they are self-inflicting serious damage to the American economy by unnecessarily destroying potential domestic jobs in manufacturing for export. More and more overseas subsidiaries of American companies are headed up by foreigners who do not have the same intrinsic orientation as Americans to favor American products or services in international commerce and who favor recruiting foreign citizens with international experience. If American managers are not directly exposed to working in international markets, how can the future leaders of our industry have the perspective necessary to effectively compete in the global economy?

This is not a new issue. But unfortunately legislators have ignored the warnings and conclusions of the President’s Export Council in 1979 and of the GAO study in 1981. Trade statistics show the dramatic consequences. The U.S. trade balance turned negative for the very first time in the 20^th century in 1971. Our last-ever trade surplus was in 1975. In the late 70’s the trade deficit was around 1% of GDP. Today, with the rapidly increasing trade deficit currently running close to an unsustainable 7% of GDP and the nation’s competitiveness becoming a growing concern, it is high time for Congress to wake up and act to give export development priority.

Course of Action

To alleviate the double taxation burden on Americans working overseas, American Citizens Abroad suggests the following urgent four step course of action:

First, request an update to the 1981 GAO report ID-81-29.
Second, call for Congressional hearings on this issue.
Third, cancel immediately the retroactive tax hike in Section 515 of TIRPA, enacted in May 2006.
Fourth, work on a bi-partisan basis to bring about fundamental tax reform for overseas Americans as rapidly as possible through support for the Working American Competitiveness Act.

Cancel Immediately the Retroactive Tax Hike Enacted in May 2006

The Senate Finance Committee estimated that $200 million of revenue per year would be raised through Section 515 of TIRPA. While this amount is very significant for the overseas Americans concerned, it an insignificant rounding error in the U.S. government budget and can easily be compensated by the elimination of one or more of the thousands of pork barrel expenditure bills passed in 2006. In 2006, Congress allocated a record $71.77 billion to 15,832 special projects, more than double the $29.11 billion spent on 4,155 pork-barrel projects in 1994.

The new cap on the housing exclusion/deduction is most seriously impacting middle-income families and affects, in particular, American companies and their overseas employees. While the Treasury Department has established a list of “exception cities” where rents are evidently significantly higher than the cap provided in the law, the need for such exceptions only reinforces the arbitrariness of the law. In fact, the Treasury list is based on locations known to the State Department and has missed some important economic centers with high rents where Americans work. For example, The Treasury Department set the maximum actual rent cost for Geneva, Switzerland at $70,300 and for Bern at $50,900, but made no specific mention of Zurich which was included in “all other cities” of Switzerland with a maximum rent cost of $32,900. Yet rent costs are very similar in Geneva and Zurich. Similarly, if one lives in a suburb of Geneva, which has rents comparable to the city of Geneva, the maximum rent cost of $32,900 is applicable. This law also creates a disproportionate administrative burden on the IRS and the Treasury Department; it is not the business of the Treasury or the IRS to survey rents worldwide. Putting a cap on the foreign housing exclusion/deduction is fundamentally bad tax law.

It is also essential that the stacking measure introduced in Section 515 be eliminated, as its sole purpose is to push Americans resident abroad into higher tax brackets in the U.S.; this seriously accentuates the double taxation. For example, an American taxpayer overseas with a salary of $85,000 and a rent allowance of $48,000 will have a total income of $133,000. His taxable income after exclusions will jump from around $17,000 in 2005 to $39,000 2006 due to the new cap on the housing exclusion; in addition, he will find himself in the 28% tax bracket in 2006, based on $133,000 total income, compared to the 10% bracket in 2005, based on $17,000. This leads to a six-fold increase in U.S. taxes due. It must not be forgotten that Americans residing overseas pay first and foremost taxes in the country of residence. It is necessary to return to the status in Section 911 whereby tax rates on Americans resident overseas are determined only by the level of income exceeding the foreign earned income and housing exclusions, not total income including those exemptions. This will eliminate a severe tax penalty on the middle income managers and professionals.

Bring About Fundamental Tax Reform Concerning Overseas Americans

The most fundamental tax reform for Americans residing overseas would require the United States to adopt, like all other industrial countries, residency-based taxation for its nationals rather than citizenship based taxation. However, since it is feared that U.S. billionaires might change residency just to escape US taxes, there is understandably great resistance in Washington to this most fundamental reform. Nevertheless, the current situation where Americans citizens are excluded from overseas employment by American companies is not only detrimental to the vital interests of the nation but also contrary to the spirit of the Equal Opportunity Employment Act of 1965 which outlaws job discrimination, in this case against our own citizens, based on national origin.

U.S. exports must grow more rapidly. U.S. exports have systematically remained in the range of 10% of GDP for the past 25 years, but currently cover only about two-thirds of imports; in order to close the gap with imports, exports need to increase by more than 50%. If American industry is encouraged to work towards this objective and is freed up from constraining U.S. fiscal laws for its overseas subsidiaries and its American employees abroad, a significant increase in exports is possible, particularly in China and the other the rapidly growing markets in Asia and Latin America where U.S. exports are seriously underrepresented today.

The Working American Competitiveness Act, initially introduced in the 109^th Congress (S-3496; H.R. 5986) provides a good solution. This proposed law would eliminate the cap on foreign earned income exclusion; it would eliminate the need for a separate housing exclusion. The Working American Competitiveness Act would:

put Americans working overseas on a more level playing field with foreign nationals abroad who, unlike Americans, are never double taxed by their home countries
encourage American corporations to send more Americans overseas
reinforce the nation’s competitiveness in world markets
simplify the law
reduce double taxation on Americans working overseas
maintain the current requirement that all Americans resident overseas file U.S. tax forms and meet their U.S. tax obligations on revenue other than earned income and on capital gains. The billionaires remain in the system.

The purpose of the foreign earned income exclusion is to avoid double taxation on earnings for Americans working and residing overseas. The problem with a cap is that it does not keep up with reality. The current cap of $82,400 for the foreign earned income exclusion is ridiculously low. The foreign earned income exclusion established in the mid sixties for bona fide overseas residents was $25,000. Today, that $25,000 would be worth $150,416 if indexed with the CPI of the USA. And this does not take into consideration the substantial change in exchange rates and relative overseas purchasing power.

For example, the U.S. dollar has declined over 40 years from CHF 4.30 (Swiss Francs) in 1966 to CHF 1.20 in December 2006. Hence, the 1966 foreign earned income exclusion of $25,000 compensated for a salary of CHF 107,500 whereas the 2006 exclusion of $82,400 at the exchange rate of 1.20 compensated for a salary of only CHF 98,880, which is 8% less in absolute terms than in 1966. If the CHF 107,500 allowed in 1966 were adjusted for inflation by the Swiss CPI, the exempted Swiss Franc salary in 2006 would need to be CHF 352,000, 3.27 times the 1966 salary level. In other words, a foreign earned income exclusion of $300,000 today, not $82,400, would be comparable to the foreign earned income exclusion of $25,000 in 1966.

A more recent example of foreign exchange movements illustrates only too well the tax lottery faced by Americans working overseas due to the cap on foreign earned income exclusion.. The euro and dollar were exactly at parity on November 6, 2002; by November 6, 2006 – just 4 years later, the dollar was worth only € 0.78670. An overseas American resident in Europe who was paid €100,000 in Nov 2002 and was still earning that €100,000 in 2006, is considered by the U.S. government to have had a salary increase from $100,000 to $127,114 – a 27% increase. With the U.S. dollar continuing to decline against other currencies, this distortion will become more perverse with each passing day.

The Working American Competitiveness Act would avoid these problems and would allow Americans, particularly middle-income managers and professionals with families, to compete in international markets. Most importantly, it would allow American companies to begin hiring once again Americans for important overseas positions.

Estimated Cost of this tax reform: Based on the IRS tax statistics of 2001 (latest available) for Americans filing form 2555, American Citizens Abroad estimates that elimination of the cap on the foreign earned income exclusion would cause a direct tax revenue shortfall to the United States in the range of $1 to $2 billion per year. This shortfall in U.S. tax revenue can be compensated by cutting out more pork-barrel expenditures. However, from a dynamic economic perspective, a reinforced presence of Americans in American overseas operations should stimulate exports of American goods and create domestic jobs. Tax revenues from this increased domestic economic activity would more than compensate for the tax shortfall from overseas Americans.

Thank You for Your Support

On behalf of all Americans residing overseas, American Citizens Abroad thanks you for your interest and comprehension. The taxation of Americans residing overseas concerns the nation’s interests, not just those individuals residing overseas.

We strongly encourage you to contact your fellow Congressmen who supported the Working American Competitiveness Act in the 109^th Congressional session. A list of those members is provided below for your reference. We hope that similar proposed legislation will be rapidly reintroduced into the 110^th session with bi-partisan support.

American Citizens Abroad would be pleased to provide you with any additional information you may request and to answer any questions you may have. Kindly send an e-mail to info.aca@gmail.com, attention Tax Committee.

American Citizens Abroad

January 2007