It is a diverse list: one of the world’s greatest soul singers; a best-selling author, a professional basketball player, architects, artists, lawyers, retirees and financiers.
The register of individuals who have “chosen to expatriate”, as the US puts it, shows an increase in the number of Americans who are renouncing their US citizenship or turning in their green card. When the number reached 3,415 last year it was a record, although the figures are still tiny, especially in comparison with those being granted US citizenship — nearly 780,000 in 2013. But it is also the case that the numbers have risen more than 10-fold since 2008.
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Those revoking US citizenship stress that it is an irreversible decision that is often taken reluctantly. Marilyn Ginsberg, a retired university lecturer who has lived in Canada since the age of 26, says she cried when she took the oath of renunciation in Quebec last year. She thought of her upbringing in Colorado and her ancestor who had sailed from Europe to Kentucky in 1848. “It was very emotional for me. I thought why do I have to do this? It seemed so unfair.” The driver behind her expatriation was US tax rules, she says.
The US tax regime is increasingly a reason for expatriations — not just because of the scope for extra bills but also the complexity.
Many countries’ tax systems have quirks, including the UK. Its “non-dom” rules, for example, allow foreign residents to keep their offshore income out of the tax net, although the Labour party, the main opposition, has threatened to end the arrangement if it holds power after the general election in May. But the US system is particularly unusual. No other industrialised country taxes its citizens wherever they live.
Reasons for severing links with the US include protest, political ambitions elsewhere and bans on dual citizenship in certain countries. Expats such as Tina Turner — a long-time Swiss resident who swapped US citizenship for that of Switzerland in 2013 — often do not comment on the move, other than to stress their affection for their adopted home.
There is scope for big tax savings for those giving up their passports, even though they must get their tax affairs up-to-date and potentially pay exit taxes if they are high earners, or own more than $2m of assets. But tax savings are rarely stated as a motivation, not least because such an admission could potentially be used to bar entry to the US in the future.
When Eduardo Saverin, one of Facebook’s founders, renounced his US citizenship in 2012 and moved to Singapore, his spokesman denied the move was motivated by tax savings, which some tax experts had speculated would run into tens of millions of dollars.
But for some people, it is the complexity of the US tax system that drives them to give up citizenship, according to Nina Olson, the Taxpayer Advocate, an watchdog for the Internal Revenue Service. “For some US taxpayers abroad, the requirements are so confusing and the compliance burden so great that they give up their US citizenship.”
The problems have escalated since 2009, when scandals about offshore tax evasion led to a crackdown on Americans owning foreign bank accounts. Its centrepiece — the 2010 Foreign Account Tax Compliance Act — is forcing foreign financial institutions from the end of last month to hand over account details of Americans with balances of more than $50,000.
Introducing the measures has imposed big costs on financial institutions, and prompted some to withdraw their services to Americans. “Banks in Switzerland and France treat you like a pariah,” says one former US fund manager, who declines to be named.
It has also sparked fear among many of the 7m or so Americans living and working abroad, the vast majority of whom have either been ignorant of or simply ignored the tax reporting rules.
Stephen Kish chairs the Alliance for the Defence of Canadian Sovereignty, an organisation that is mounting a legal challenge over Fatca: “Many are really scared. They are afraid their own banks will turn them in.”
Some people were unaware of their filing obligations until the recent IRS crackdown. Examples include where citizenship was handed down from a US parent and other cases where — like Boris Johnson, the London mayor, and numerous “border babies” — individuals gained citizenship by being born in the US.
Four out of five Americans living abroad had no extra US tax to pay in 2011, according to IRS figures. The problems can arise from mismatches between two countries’ tax systems. Mr Johnson described the US tax bill — estimated at nearly £30,000 — that he faced on profits from the sale of his north-London house as “absolutely outrageous”.
The costs of filing are also high as they may require thousands of dollars worth of professional input, even if there is no tax to pay. Although it has become easier and cheaper for US citizens abroad to bring their tax affairs up to date since a “streamlined” procedure was introduced last summer, problems remain. For instance, new waivers were not available to taxpayers who had already come forward before then. That left those “most deserving of leniency” feeling punished, says Ms Olson.
Then there are the big bills facing investors in foreign mutual funds, which attract penal US tax rates — 39.6 per cent plus interest — and convoluted reporting requirements. Official estimates suggest the form filling for a single fund requires 10 hours of study, 17 hours of record-keeping, and 14 hours of preparation.
Civil War origins
The origins of the US system of citizenship taxation date back to the draft dodgers of the American Civil War. Extra taxes were imposed on US citizens living abroad to compensate for their failure to contribute their personal efforts to the Union “in this day of its extremity”.
The US is unique in imposing the same system of taxation on its citizens wherever they live, although subject to various reliefs and exclusions. Only one other country, Eritrea, taxes the foreign income of citizens living abroad, although many tax domestic income sent abroad or make other claims on their expats. The UK, for instance, imposes inheritance tax on people who left Britain many years earlier but never lost their British domicile.
For Ms Ginsberg, the mounting costs and administrative burden associated with her mutual funds were the final straw in her decision to expatriate. But some other US citizens say they cannot afford to regularise their tax affairs in order to expatriate.
One widow, who declines to be named, living in Canada since the 1970s, was horrified when she discovered the costs of disclosing her 20 mutual funds. She calculates the price of employing an accountant to fill in the forms on her behalf — a necessity given their complexity — would be more than twice her total annual income.
IRS investigators have threatened non-compliant Americans living in Canada with fines and even imprisonment, according to Allison Christians of McGill university. But there is also scepticism over whether the IRS will be able to enforce its rules. In the view of one US-born Canadian: “The whole thing is a campaign of fear”.
Enforcement is perhaps the biggest challenge for the US system of citizenship-based taxation. But there is also a growing debate over the principles.
Champions of the existing system say it is right to ask citizens to pay for its privileges, which include the right to vote in federal elections and work in the US. But critics — including Republicans on the Senate finance committee — have called for a “rethink” of the tax rules for non-residents.
Such change cannot come too soon for many of the Americans drawn into what Ms Olson describes as a “Kafkaesque” international tax regime.
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