Due to the recently implemented Foreign Account Tax Compliance Act (FATCA), Americans living abroad are renouncing their U.S. citizenship in droves. In fact, according to the Federal Register, the number of expatriates giving up their nationality in the second quarter has increased sixfold, to 1,131 from 189 in the same period last year. In total, 1,810 Americans have given up their citizenship in the first half of this year alone, compared with only 235 in the entirety of 2008.
Why the mass disassociation with the United States? Under FATCA, IRS rules for expatriates haven’t actually changed, but foreign institutions are now required to report financial accounts held by U.S. citizens and resident aliens, or foreign entities substantially owned by U.S. taxpayers. A considerable number of countries are complying with act to avoid a withholding tax on their financial transactions occurring in the United States: Japan, Canada, Switzerland, Ireland, and Mexico, along with most Western and EU nations. Some foreign financial institutions, however, have expressed concerns that FATCA is too complex and are reportedly wary about working with U.S. clients due to its extensive reporting requirements.
Americans who disclose their non-U.S. bank accounts to the IRS are required to file an additional Form 8938, the Statement of Specified Foreign Financial Assets. Failure to file this form can result in a fine as large as $50,000.
Matthew Ledvina, U.S. tax lawyer at Anaford AG in Zurich, observes, “With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad. Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”
An anonymous investment banker, who renounced his U.S. citizenship in favor for citizenship in Hong Kong, shared his perspective with The Wall Street Journal: “My decision was less about the actual amount of taxes I had to pay, and more about the system. The U.S. system does not incentivize anyone to go overseas anymore. As a country, your sphere of influence is impacted.”
Perhaps that’s the central issue at stake here. If, under the guise of “catching tax-evaders,” the government punishes and overburdens those living abroad, it will pay the ultimate price: the loss of U.S. citizens.