Impact of Anti-Tax Evasion Measures on American Expats

Issue: Measures taken to decrease tax evasion, fight terrorism, and fight money laundering have created hardships for Americans who are working overseas. This effect has increased since the 2010 passing of the Foreign Account Tax Compliance Act (FACTA).

Stakeholders: American citizens working overseas and American citizens who may want to work overseas.

Possible Ramifications:

Possible ramifications and the effects on taxes will be broken down into two sections:

1. The Expat

• The tax code is currently set up in a way to be very restrictive for U.
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  S. citizens working overseas.

• This restriction can often lead to the expat renouncing his or her U.S. citizenship.
• Those who opt to keep their citizenship often pay for it financially, as the expat must pay U.S. taxes and taxes to whichever country he or she is working in.
• Expats are treated as second class citizens in regards to taxation.

2. The Government

• Changing the tax code would mean that the revenue brought in from expats would need to be found elsewhere.
• When the restrictive tax code causes expats to renounce citizenship, the country often loses a valuable member who may have otherwise contributed to the country in the future.
• Americans working overseas are often multilingual, have a better understanding of the culture, and are as a result key influencers in facilitating trade, investments, and furthering foreign policies.

America is the only country in the world that taxes its citizens on global earnings and the FACTA currently affects 8.7 million U.S. citizens working overseas (Graffy, 2015). The negative effects are compounded due to many international accounting firms declaring that the tax issues of American clients are not worth the hassle, leaving many expats alone in navigating the difficult and confusing tax code that applies to them.

Under FACTA, foreign institutions must report the identities of their American customers and their assets to the U.S. government, or else be hit with a 30 percent withholding tax on their own transactions.

All of these issues means being an American working overseas has become harder and harder, with many institutions not wanted to risk the hassle at all. In some extreme cases companies have given some of their high value employees an ultimatum; give up your citizenship or give up your job. This type of hard decision has become more common place since the passing of FACTA; 3,417 U.S. citizens renounced their citizenship in 2014, a 266 percent increase from before the passing of FACTA (Graffy, 2015). On the other end of the scale, some U.S. citizens are so flustered by the tax code inflicted on expats that they move back overseas, often leaving behind high paying jobs and not knowing whether the same type of job will be available state side (Yan, 2013).

While the anti-money laundering and tax evasion aspects of FACTA are theoretically good to have, the act has done more harm than good overall. I am all for a comprehensive tax reform that negates the negative aspects of being an expat. As the only country who still taxes global earnings, the U.S. should catch up to the rest of the world. Not taxing global assets increases economic competitiveness and protects one of the country's best and most irreplaceable assets, its people. The world has become a smaller place over the years for various reasons, but a tax code that punishes those who take advantage of the global market and mobility of the job market is counter intuitive to this fact.

Congress will, of course, have issues that will need addressing before any sort of tax reform can be passed to get rid of taxing global earnings. The main issue will be the need for banking transparency; the government certainly doesn't want to make it easy for people to make transactions that profit or fuel illegal activities and while most citizens are likely in agreeance, the current way things are set up is closer to holding expats as guilty of financial crimes until proven otherwise. Luckily, as the only country who still taxes global earnings, the U.S. has many examples and case studies to choose from in the form of any other country in the world. What works for other countries? What doesn't work? The U.S. is in a good position to not only take the good aspects of other country's current tax codes, but to also shape new tax codes into something that they can still say is unique for the U.S.

There may even be room for compromise between the no tax on global earnings and taxing all global earnings scale. A smaller flat-tax on global earnings may help all parties meet more towards the middle. The government would have less revenues that needs to be made up elsewhere, while still having some degree of control on keeping an eye on foreign transactions that help in the battle against legal activities. Expats would see less taxes and the tax code would become much less complicated, leading to foreign accountants to not dropping their U.S. clients and the companies not needing to give their U.S. workers an ultimatum between job and citizenship. This would also allow expats to keep their citizenship and allows the country to retain some of its most productive citizens.