Could Renouncing US Citizenship Become Business as Usual?

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Could Renouncing US Citizenship Become Business as Usual? post image

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Last week a huge media-storm erupted as it became public knowledge that Facebook co-founder Eduardo Saverin had filed to give up his US citizenship.

When I heard the news I didn’t even think twice about it. I guess I’m in a bit of an entrepreneurial bubble. My friends and I talk about citizenship, banking, and taxation on a daily basis. I do understand why these issues inspire heated debates, but for many of us who have lived abroad for long periods of time, issues around foreign residency and citizenship are matters of fact.

There’s a lot of great things about being an American who lives abroad– those are pretty well documented. There are also a lot of downsides.

Here’s a few:

  1. Americans are taxed on their worldwide income. “The United States is the only major country which taxes based on citizenship rather than residency.” [source
  2. Americans need to tell the IRS about any bank account or company they have any control over. It might sound like no big deal, but add a few small investments to your portfolio and all of a sudden you’ve got a big headache on your hands. What makes it even worse is that…
  3. The US tax code is terribly complex, confusing, and expensive to comply with. This is the case even for highly experienced professionals in the game for decades.
  4. Many banks and overseas professionals won’t deal with Americans. It’s looking like this is about to get a lot worse. “The foreign banks also must provide an annual report of the account balance, gross receipts and gross withdrawals of the U.S. account holders.” [Source: MSN]

It’s no wonder that many long term US expats would prefer to take on another citizenship. So far, the US hasn’t looked kindly on individuals who have made such a decision. Recently, Senators Casey and Schumer have gone so far as to suggest that the penalty for citizens leaving the USA for tax reasons should be a lifetime ban from re-entering.

It’s already pretty bad, check out these current policies for US citizens who decide to renounce:

In 1996, the U.S. changed its immigration law to include a provision to “name and shame” renunciants… In 2008, Congress enacted… an “exit tax” … effective June 2008, U.S. citizens who renounce their citizenship are subject under certain circumstances to an expatriation tax, which is meant to extract from the expatriate taxes that would have been paid had he remained a citizen. [source]

A lot of blogs bemoan the “big brother” tendencies of the American government.

I see their point, but I also see a lot of the US government’s legislation efforts as part of a power dialectic. The government is responding to the unprecedented level of freedoms its citizens possess.

In the 1980’s, you couldn’t just jump on a plane and open up a few offshore companies for your small internet business. The US never really had to compete with Hong Kong before for small business entrepreneurs.

The decision to renounce American citizenship will ultimately come down to business as usual. 

Remember way back in the early 2000’s when you and your family members would argue about whether or not companies should send their manufacturing to China? (oh wait, that was me!) 5 years later when they went to Best Buy to buy a cheap plasma screen, they probably didn’t care at all where it was made. And last Christmas when they went to get a new smartphone, they didn’t think for a moment where it was manufactured.

It’ll likely go the same way with citizenships. Who can do it better and cheaper?

If American legislators continue to be a royal pain in the ass in the coming decades, and entrepreneurs continue to gain power and agency (and it’s the type of power they can successfully maintain abroad), they will likely continue to renounce in record numbers.

Why not let people leave peacefully and invite the best and the brightest who really want to contribute?

Schumer and Casey want to ban people like Eduardo– a guy who helped build perhaps the single most important American company in the past 5 years– from ever returning to the USA.  (Ok, maybe he didn’t build it, it’s been a while since I’ve seen the movie).

Here’s something I know from my experience of living abroad– being an American citizen and passport holder is one of the most desirable distinctions in the world. For every one Eduardo there’s 100’s of thousands of intelligent, ambitious entrepreneurs all over the globe who would kill to do the same thing he did– build the next great world-changing company on American soil.

We should get more aggressive about opening our doors to them. If after they have a billion dollar IPO, they decide to go elsewhere, let’s try not to be jerks about it.

Cheers,

 

Dan

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Published on 05.22.12
  • http://twitter.com/Mck_Dave David McKeegan

    Dan,

    I sort of think that renouncing US citizenship could lock you out of one of the biggest and fastest moving markets in the world – not a decision I would take lightly. Yes its a pain to file US taxes (something we try to lessen) and yes there are FACTA rules that make banking abroad tougher, but if you have any roots in the US (family, friends, etc) then renouncing is probably a bad idea.

    Wonder if there will be a secondary market for US citizenship in the future! As you mention a hand full of people renounce each year, but thousands want to get US citizenship! I smell an opportunity! :-)

    Keep up the great work!

    Dave

  • http://ryangoesabroad.com Ryan

    I really hope you’re right on this prognostication, Dan. To me, it seems like doing business offshore & reporting req’s have gotten more difficult in the US, not less. Citizenship seems to be going the same way… Maybe there will come an inflexion point where people will realize citizenships would in fact be better if they were business as usual, and not like some uber-religious chain on a person’s life– as many people treat it today.

  • http://www.paulovsk.com/ Paulo R. Ribeiro

    >
    We should get more aggressive about opening our doors to them. And if after they have a billion dollar IPO, they decide to go elsewhere, let’s try not to be jerks about it.

    That’s pretty much it.

  • freedom architect

    I have put a lot of thought into renouncing mine as well. I currently live in Colombia, and am in the process of submitting my bank info to the states. Feel like it’s going to raise red flags, especially because I am living in Colombia, hehe..But it’s what I have chosen to do and am happy with my decision. Interesting, I’ve actually had an FBI agent leave a comment on my blog. http://www.natebunger.com selfless advertising ;) hope you don’t mind.

    By the way, according to my US based accountant you must report any bank account which has over a $10,000 balance at any time. In other words, if your account does not have a balance that has ever exceeded 10 grand, no need to report. (obviously check with your own accountant) He has also informed me that if you remain outside of the states for more than 11 months per year, you are NOT taxed on your first $91,500 of profit. Self employment tax, social security YES, but income tax NO.

    I agree with you, we should be able to leave in peace if we so desire. I don’t like that I actually have fear about the consequences of saying I prefer to live my life in another culture. We are such bullies.

  • http://www.rankforprofit.com/ Vin

    Dan,

    I have thoughts about this every few months. Although I have yet to be affected by anything big brotheresque, I feel that it is not too far off on the horizon. Compare civil liberties today to those enjoyed by our parents and grandparents. It may surprise you.

    But, for now, I need to focus on becoming location independent. The citizenship conversation is really pointless at this time for me because I have a million other things that I need to do before that is even a reality.

  • http://FoolishAdventure.com Tim Conley

    David,
    Unless the US bans people from ever coming back, which it hasn’t yet, renouncing won’t prevent people from coming back to visit.

    The idea of the permanent ban is to lock the sheep and cattle in. “Want to see your family and friends again? Then don’t give up your citizenship.” This isn’t a sign of a free nation nor of a stable government — good reasons to consider different citizenship.

  • nlgodd

    That’s exactly the problem I have with all this. Just because you’re born in a country doesn’t mean they own you. You should have the right to leave whenever you want without any adverse effects (besides those from losing your citizenship).

  • http://twitter.com/Mck_Dave David McKeegan

    Tim,

    True regarding returning for a visit, but once you renounce you can never get US citizenship again. So giving up US citizenship could prevent you from living and working in the US again in the future. That was more where I was going with my comment.

    I can’t really see them banning individuals from ever entering the country – how would they? I know there are like 20 people with the name “David McKeegan” in the world (probably 1000’s of John Smith’s) how would the border guards really tell the one who renounced his citizenship from the one that just wants to visit NYC for the first time? I just don’t see it as a realistic possibility.

    It would however be nice if the government focused on making it a better and more attractive place to live, rather than lock people in and threaten them!

  • Scott

    Even better would be “after they have a billion dollar IPO, don’t enact rules that make them want to leave!”

    But hey, I guess someone’s got to fund Schumer’s class warfare, right?

  • Brandon

    “and entrepreneurs continue to gain power and agency (and it’s the type of power they can successfully maintain aboard)” – This is an interesting sentence, and I think you’re implying something very important. Can you elaborate on this Dan?

  • Matt Aaron

    So, look at this:
    http://www.irs.gov/businesses/small/international/article/0,,id=96822,00.html

    I am not so sure about the 11 months per year thing. It exists, but there are a lot of stipulations:

    *Residence in a foriegn country (not just a visa)
    *A foreign tax home (this is not so hard)
    *The income has been earned in a foreign country.

  • http://twitter.com/Mck_Dave David McKeegan

    Yea, the Physical Presence test says you need to be inside a foreign country for 330 days in a 365 day period. If you do that then you qualify for the foreign earned income exclusion and can exclude $92,900 from your 2011 US Taxes. This does not apply to Self-Employment tax, which you would need to pay both the employer and employee portions of, if you are self-employed.

  • Matt Aaron

    Hmmm — and also related, if you have an LLC or S Corp, you are allowed to write off our SE Tax paid in 2011 on your 2012 Taxes, right>

  • http://www.hustletoparadise.com/ Harrison

    Oh the US and its attempt to control every aspect of money earned. Glad you elaborated more on this matter Dan!

  • http://www.opheliaswebb.com/ Elisa Doucette

    Casey is a first-term senator coming up for re-election in rural Pennsylvania where he is the first Democrat in like 50 years (though kudos to him for keeping Rick Santorum out of government office!). I’d say he’s going after the working class vote by “getting” those rich people that the 99% hate (while being able to strategically avoid those 1%-ers who live in the country and contribute to campaign finances). That grandstanding speech he gave was a great PR maneuver to get eyes and ears on his name and the bill.

    No idea what rang Schumer’s bell to get on board as a co-signer. Either he believes the craziness or he’s making his own political play (he’s 3rd ranking Dem in the senate).

  • http://www.frontierlivin.com/ Taylor Pearson

    I totally agree with you analysis here Dan. It’s fascinating to me how the U.S. has managed to be so xenophobic for a nation of immigrants.

  • http://phoenixabroad.com Dave Huss

    Actually I think it wouldn’t be hard for the government to implement that if they really wanted to. They already have your photo from when you signed up for a passport, not to mention face scans in the airport immigration, and it could get added to a “Do-Not Enter” list.

    When you try to re-enter the country they run your picture through advanced face recognition software (the same one to catch terrorists). Voila good luck getting back in.

  • KevinK30

    Nice post Dan! It needed to be said. There was a book written in 1997 called The Sovereign Individual, amazing book that predicted things like this that would happen in the future, and how nation-states would eventually dissolve into security agencies that would have to compete for “citizens”, instead of using force. I hope what you’re saying will come true one day soon!

  • anon

    If you have a US corp- and you were designated as “S-type” filing, then there would be no SE tax. You don’t “have” an S Corp. You own membership in an LLC or shares in a Corporation that can be designated on your tax return. S Corp.

    If you have shares in a foreign corp, there are *generally* no SE taxes.

  • Julia

    Thank you for writing this. I heard about their proposed lifetime ban and it just seems wrong, but I couldn’t quite explain why. I think you covered it quite well here. I appreciate hearing an expats opinion on the matter.

  • http://FoolishAdventure.com Tim Conley

    The Sovereign Individual is one of my all-time favorite books. I read it again every couple of years though I think some of the predictions are going to take longer to come true than I think the authors intended.

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  • Reader

    While it’s a perfectly reasonable decision for someone with a stash of millions in multiple countries, your average online hustler that makes 20-100k a year would quickly notice that he made a bad decision once his major income stream dries up and he needs to get a job again.

    Acquiring citizenship in desirable countries is also either hard, impossible (think Thai citizenship) or takes more money than the average self-made expat will ever have on hand (think HK investment visa).

    If you’re a serial entrepreneur with rock solid skills to launch a new business once your present income streams dry up, go ahead and do it, but I certainly don’t have so much faith in myself.

  • Mike

    Not true. Many countries in SA allow citizenship after a couple years. You can get a dominica citizenship for $75,000. That’s 1-2 years taxes for the type who would wnat to pursue this strategy.

  • Mike

    I agree, things are getting far more difficult. In reporting and in renouncing

  • Mike

    Renouncing does not mean you cannot regain citizenship. There is no law about this

  • Mike

    Actually, renouncing allows you to see your family more. 30 days versus 6 months.

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