Is that fair? Not according to Senators Charles Schumer (D-N.Y.) and Bob Casey (R-Pa.). They have now introduced legislation that would retroactively punish wealthy expatriates like Saverin.

You see, Saverin still has an approximate 4% ownership stake in Facebook. While he’s already subject to an exit tax on the pre-IPO value of his Facebook stock, he won’t need to pay any tax on the difference between that value and the IPO value (approximately $38/share). Various media sources claim he will save at least $67 million in tax, but since he’s already subject to tax on the pre-IPO value, his actual savings will be substantially less.

You might think Schumer, Casey, and their peers would instead of vilifying Saverin, thank him—and Facebook—for spawning an entire industry and creating tens of thousands of U.S. jobs. Not to mention paying hundreds of millions of dollars in taxes, and making it much simpler for the NSA and CIA to assemble dossiers on anyone they decide to watch who’s on Facebook.

I’ve read the proposed “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” (or Ex-PATRIOT) Act, and it’s a real nightmare.

Under the bill, expatriates with a net worth exceeding $2 million, or with average income tax liability exceeding $148,000 over the past five years, would be presumed to given up U.S. citizenship for tax avoidance purposes. If they couldn’t prove otherwise to the IRS, they would face a 30% percent tax on future gains from U.S. investments, no matter where they live. They would also be permanently barred from any type of re-entry into the United States

Both the tax and re-entry provisions are retroactive and will encompass individuals who gave up U.S. citizenship for the 10-year period prior to enactment of the statute.

The real questions are:

• Will this proposal become law?
• If it becomes law, will the courts uphold it?

I think there’s a very good chance that in the current political atmosphere, the Ex-PATRIOT Act could pass. Think of it this way: if you were a politician in Washington, D.C., and wanted to get re-elected, would you dare to vote against it?

If the bill becomes law, I also think the courts will uphold its tax aspects, including retroactive application to individuals who expatriated prior to its coming into effect. From a tax standpoint, the only real difference between the Ex-PATRIOT Act and the current exit tax law is that expatriates would face a 30% percent tax on future gains from U.S. investments. Under current law, non-resident aliens investing in the United States need not pay tax on gains from sales of securities and certain other investments.

However, prior to 2008, wealthy expatriates faced a discriminatory tax regime with respect to some U.S. investments. I’m not aware of any court challenges to this former regime. Should the Ex-PATRIOT Act be enacted, I see no reason why the courts wouldn’t respect congressional legislative authority.

As for retroactive application of tax rules, the Supreme Court has repeatedly held this is perfectly sound policy, despite the U.S. Constitution’s prohibition of laws with retroactive effect (ex post facto laws). Such laws are unconstitutional only when criminal activities are involved, the Supreme Court says. The prohibition doesn’t apply if “only” money or property is at risk. To pass constitutional muster the retroactive aspects of the statute need only be “rationally related to a legitimate legislative purpose” (United States v. Carlton).

Permanent exclusion from the United States is another matter. Back in 1996, Congress enacted a similar law, the Reed Amendment to the Immigration and Nationality Act. The amendment gives the U.S. Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounced U.S. citizenship in order to avoid U.S. taxation. Other categories of “excluded persons” are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.

Yet, 16 years after its original enactment, regulations under the Reed Amendment have never been issued, nor has its power ever officially been invoked. However, some U.S. consular officials have denied visa applications from former U.S. citizens, apparently using the Reed amendment as legal authority for doing so. Again, I’m not aware of any court cases testing this law. Indeed, it would probably be impossible to challenge exclusion based on the Reed Amendment since it’s never officially been used.

However, if the Reed Amendment—or the Ex-PATRIOT Act were ever officially enforced, it would be open to court challenge on numerous grounds, including conflict with bilateral U.S. treaties of “Friendship, Commerce, and Navigation” and similarly titled treaties, and the non-discrimination provisions of U.S. tax treaties.

It would also be subject to constitutional challenges. While the United States has the right to exclude certain classes of individuals from entering the United States, that’s not why Senators Schumer and Casey have introduced the Ex-PATRIOT Act. The sole purpose for the proposal is to deter a wealthy person from giving up citizenship in the first place. That is, faced with the certainty that he or she will never be able to re-enter the United States, the individual will make the decision not to expatriate.

This must be the purpose, because there’s no other rational reason why such a statute could be proposed. Wealthy visitors to the United States spend money and pay state sales taxes on almost anything they buy. If they invest in the United States, they may also pay local, state, and/or federal taxes.

When a law infringes a fundamental right, such as the right to expatriation, U.S. courts have ruled it must be reviewed under a standard of “strict scrutiny.” Such laws may be upheld only if they meet a “compelling interest.”

Does excluding wealthy, free-spending, tax-paying visitors out of the United States serve a compelling national interest? Senators Schumer and Casey think it does. I’m not sure the courts will agree.

Copyright © 2012 by Mark Nestmann

I traveled here using my Commonwealth of Dominica passport. I applied online for a visa on arrival after paying a nominal fee. This resulted in a letter being issued listing my name, date of birth, citizenship, and passport information. The airline allowed me to board with my passport and this letter.

Upon arrival at Tan Son Nhat Airport, I went to the desk marked “Landing Visa” and paid a stamp fee. A Vietnamese official then affixed the visa in my passport. This only took about seven minutes. After I received my visa, I entered the line at passport control, waiting behind a few overseas Vietnamese. After completing this process, I collected my baggage, cleared customs, and proceeded to the waiting hotel car.

Traveling on a Dominica passport to many other countries in Asia is just as easy as in Vietnam. The visa-on-arrival system is also used to enter Cambodia, Laos. and (under limited circumstances), the People’s Republic of China. Entry to Hong Kong and Singapore is completely visa-free on a Dominica passport. Visits to Japan and Thailand require obtaining a visa in advance, but the process is straightforward and not at all time-consuming.

As a former U.S. citizen, I can tell you that one of the most pleasant aspects of using a passport from Dominica is that I have never experienced discrimination or harassment. Opening bank and investment accounts using my Dominica passport is easy and travel is generally hassle-free. Unlike the United States, Dominica is at war with no one, has no embargoes in effect against other countries, and isn’t trying to force banks outside Dominica to enforce Dominica’s tax laws.

If you’re interested in obtaining citizenship in the Commonwealth of Dominica through the Economic Citizenship Programme, the Nestmann Group are authorized agents. Contact us for more information.

Copyright © 2012 by The Nestmann Group, Ltd.

In France, socialist candidate Francois Hollande won a clear victory in the country’s May 6 presidential contest. Central to Hollande’s platform: an “end to austerity” and a whopping 75% tax rate on France’s wealthiest residents. Hollande proposes that the rate apply to anyone earning more than one million euros annually. Not to be outdone, Hollande’s opponent, incumbent Nicolas Sarkozy, has proposed that French citizens who relocate abroad be forced to pay any tax savings to the French government. If they fail to do so, they would forfeit their French citizenship and passport.

Perhaps it’s time for wealthy French citizens to consider obtaining a second passport, as well as a second home!

Spanish residents who wish to conduct business privately might want to look for a second home as well. Spain’s government recently outlawed the use of cash in business transactions larger than 2,500 euros. This is designed to crack down on tax evasion and the underground economy.

But, there is a larger purpose to this initiative. It is to restrict and eventually eliminate the cash economy. Governments don’t like cash. Cash is difficult, if not impossible to trace. Cash makes it possible to do business “off the books.” Spain’s new law is fundamentally a war on cash—one that is sure to spread to other countries.

Meanwhile, in Greece, political chaos reigns. Last week’s election led to extreme right-wing and extreme left-wing parties collectively receiving more than 50% of votes. On the left, former communist youth activist Alexis Tsipras is credited for inciting violent protests against austerity measures demanded of Greece by its creditors. On the right, the neo-Nazi “Golden Dawn” party, led by Nikolaos Michaloliako, intimidates journalists who criticize its populist, anti-immigrant stance. According to Michaloliako, “Those who slander us” and “those who betray this country should be afraid: we’re coming.” Golden Dawn graffiti calls for “a new Holocaust to clear the filth from the country.” Needless to say, anyone living in Greece who can afford to find a second home would be well-advised to do so.

Populist proposals to tax the wealthy at confiscatory rates, strip citizenship from those engaged in legal tax avoidance, restrict the use of cash, and punish immigrants should come as no surprise. Such political initiatives tend to proliferate in times of economic crisis. And as global economic collapse intensifies, Europe’s political chaos will spread to the United States. Count on it!

The Great Depression of the 1930s provides a clue as to what to expect. One of the most popular politicians of that era was Louisiana Sen. Huey Long. His message was simple: confiscate the fortunes of wealthy Americans and redistribute the money to the masses. President Franklin Roosevelt responded by banning private ownership of gold and silver and imposing a “Wealth Tax,” boosting the tax rate for the wealthiest Americans to 79%. And in an orgy of anti-immigration sentiment, more than 400,000 U.S. residents were deported or otherwise forced to leave the United States. Most deportees were immigrants, but some were born in the United States and thus U.S. citizens.

Make no mistake: political developments in Europe are a harbinger of events to come in the United States. As the era of easy money, near-guaranteed employment, and welfare benefits for anyone who asks for them comes to an end in the United States, political polarization will become even more pronounced. Tax hikes, anti-immigrant rhetoric, attacks on wealth, and political violence will become everyday events, as they are in Greece.

Are you prepared for this new reality? Having assets overseas, a suitable residence in a financially stable offshore jurisdiction, and a second passport will only become more important as the collapse of the global financial system accelerates.

Copyright © 2012 by Mark Nestmann

For U.S. citizens, a second passport has another benefit: it is an essential prerequisite to expatriation. This is the process of giving up U.S. citizenship in order to disconnect permanently from U.S. taxing authority.

Just about everyone can benefit from a second nationality and passport. Unfortunately, it’s not easy to obtain one, unless you qualify by virtue of ancestry, marriage, religion, or long-term residence in a foreign country. However, a handful of countries offer “instant” citizenship in return for an economic investment contribution. The Federation of St. Kitts & Nevis, an independent nation in the eastern Caribbean, offers a compelling opportunity in this regard.

Formerly a British colony, the Federation came into being in 1983, when the islands achieved independence from the United Kingdom. St. Kitts is larger and more populous. Nevis is smaller and more rural.

The World’s Leading Citizenship-by-Investment Program

Since 1984, the St. Kitts & Nevis Citizenship Act has authorized foreign investors  to obtain citizenship and passport through a qualifying real estate investment, and since 2006, through a qualifying contribution. This makes it the oldest existing citizenship-by-investment program.

There are two options. All prices listed are in U.S. dollars.

Real estate option. To apply for citizenship under this option, you must invest a minimum of $400,000 in qualified real estate. Funds for your investment are placed in escrow and released only after your application for citizenship is approved. This investment qualifies you, your spouse, and your minor children under the age of 18 for citizenship. Children 18-25 enrolled full-time in a university and adult dependent children or parents qualify as well.  You may live in the dwelling you purchase, or rent it out—nearly all approved projects provide a managed rental program.

Not all real estate in St. Kitts & Nevis qualifies for the purpose of acquiring economic citizenship. You must purchase real estate in developments with governmental approval for the citizenship-by-investment program. However, most new real estate projects have this authorization.

There are dozens of qualified developments from which to choose.They vary from small studio or one-bedroom units for the minimum investment of $400,000 to multi-million-dollar villas with spectacular ocean views—and everything in between. You can also opt for a fractional ownership scheme where you can purchase a one-quarter share of a $1.6 million beachfront villa for $400,000. Even a time share, raw land, or a yacht slip qualifies at a few developments.

Charitable contribution option. This option requires a payment of $250,000 or more to the “Sugar Industry Diversification Foundation” (SIDF), an entity set up to benefit sugar workers displaced by the elimination of large-scale sugar cane production in 2005. You make the contribution only after the government approves your application. The same conditions apply for your spouse and children accompanying your application.

Neither option requires you to travel to St. Kitts & Nevis for an interview, but I recommend that you do so, especially if you plan to purchase property there. The program was radically streamlined for 2012 and the government now promises a decision within three months of filing an application.

See the table below for a breakdown of costs for five hypothetical applicants for applications filed through our firm. All applicants must also submit to a thorough background check, provide bank references and letters of recommendation, along with proof of no criminal record in their home country. (The Nestmann Group, Ltd. operates exclusively through government licensed and approved agents.)

Expensive…but a Very Useful Travel Document

The cost alone limits the number of people who can afford to purchase St. Kitts & Nevis citizenship and passport. However, with this expenditure, you’ll possess a very useful travel document. The passport gives you visa-free access to more than 120 countries, including all 27 members of the EU. If you have British ancestry, a St. Kitts & Nevis passport may also entitle you to live and work in the United Kingdom.

You need a visa to enter the United States. But, obtaining a U.S. visitor’s visa usually is easy if you can prove you have a permanent home outside the United States and have a clean criminal background.  Keep in mind that if you’re a U.S. citizen, you need to enter and leave the United States using a U.S. passport.

St. Kitts & Nevis citizenship also comes with a lot less “baggage” than, say, U.S. citizenship. This makes a St. Kitts & Nevis passport very convenient to open offshore bank accounts and establish offshore businesses. Unlike the United States, St. Kitts & Nevis doesn’t tax on the basis of citizenship—only residence. As a St. Kitts & Nevis citizen, you pay tax only on income you earn on one of the islands. Nor does St. Kitts & Nevis impose capital gains taxes, wealth taxes, or inheritance taxes. Offshore banks and service providers like dealing with St. Kitts & Nevis passport holders because its government isn’t trying to chase down its citizens outside its territorial boundaries. Nor does it have armies of tax collectors offshore.

You have no obligation to live or work on St. Kitts & Nevis once you acquire citizenship and passport there, although you can do so any time. And, in the unlikely event you ever find yourself in a terrorist situation, you’ll be comforted by the fact that you possess a passport from a peaceful, neutral country not at war with anyone.

Incidentally, it’s not difficult to establish permanent residence without citizenship in St. Kitts & Nevis. However, you’ll need to live there for 12 years in order to qualify for citizenship by naturalization. That’s a long time to wait for a second passport. If you’re interested in obtaining citizenship in a country after a reasonably short period of residence, without needing to make a large investment, St. Kitts & Nevis isn’t a good choice.

Unfortunately, dual citizenship for U.S. citizens doesn’t end the obligation to pay U.S. income tax on your worldwide income and file U.S. tax and reporting forms, even if you live permanently offshore. The only way to end this obligation is to give up your U.S. citizenship and passport—something you can easily do once you obtain your St. Kitts & Nevis passport. I discuss this process of “expatriation” in my newly-updated special report, The Billionaire’s Loophole. Click here to learn more.

Real Estate or Contribution…Which Option is Best?

The answer depends on your particular circumstances. In some cases, real estate is a better choice:

• If you would seriously consider living on one of the islands for at least a few months each year. In that event, your qualifying real estate investment gives you a permanent home on the islands.
• If you want to purchase offshore real estate as an investment. That makes the real estate option more compelling since along with your investment you obtain citizenship and a first-class passport. You can also use your self-directed IRA or 401K to buy qualifying real estate. However, you won’t be able to live in it until you distribute the property from the tax-sheltered plan and pay income tax on (usually) the full amount of the distribution.
• If you’re concerned about lawsuits, real estate you own offshore will never show up in a domestic asset search. Moreover, foreign real estate you own in your name need not be reported to the IRS or U.S. Treasury as a “foreign bank, securities, or ‘other’ financial account.” This includes both Treasury Form 90-22.1 and the new IRS Form 8938. However, if you rent out the real estate, the income generated is taxable and reportable to the IRS.
• If you can find a compelling value in a property that has good prospects for future appreciation or cash flow. Properties located near airports or medical schools on both islands, for instance, often provide a relative steady income stream from flight crews and students. A few developments guarantee a rental income (4% is typical) for a certain period. Just remember that such guarantees are only as reliable as the financial standing of the developer.

In other cases, the SIDF option is preferable:

• If you want the lowest initial cost for your passport. As the table demonstrates, the initial cost of the SIDF option typically costs around $200,000 less than the real estate option. However, after you’ve held qualified real estate purchased in 2012 or thereafter for five years, you can sell it to someone else seeking economic citizenship. Assuming you break even after adding whatever rental income you’ve earned, and deducting your costs, a 12% transfer tax and broker commissions (typically 5% or more), your net costs may be less—perhaps considerably less—than if you’d made an outright $250,000 contribution.
• If you want the fastest possible way to economic citizenship and passport. Once you pass the background check, you make your contribution. A few weeks later, you receive your certificate of naturalization, and subsequently, your passport. You avoid the hassles and inevitable delays of large real estate investment, some of which can also delay processing of your application.
• If you don’t want to be tied down to a large real estate investment. Like real estate anywhere, property in St. Kitts & Nevis costs money to maintain. The SIDF option avoids continuing utility bills, homeowner’s association fees (typically $500 or more monthly, covering all external repairs), and a local tax of 5% of the estimated rental value of your property. If you do rent out the property, though, the actual rental income is tax-free.

Bottom line: If you’re risk-averse, the SIDF option is the preferred option. But, if you’re looking for an easy avenue for offshore diversification, or you’d enjoy spending a few months annually on a largely undiscovered tropical island, buying qualifying real estate and obtaining a second passport as a bonus is worth considering.

For more information, contact The Nestmann Group, Ltd.

Copyright © 2012 by Mark Nestmann

An earlier version of this article was published in the Simon Letter

One of the most interesting destinations has been the Republic of Cuba. Not being a U.S. citizen makes the process of visiting Cuba much easier. Due to a longstanding U.S. embargo against Cuba, U.S. citizens and permanent residents generally must obtain a license from the U.S. Treasury to visit and especially to spend money there. But, as a citizen of Dominica, I merely need to show my passport to obtain visa-free entry into Cuba.

In a recent post, I discussed reforms taking place in Cuba, as well as the loosening of restrictions on Cuban citizens. At the same time, the United States is imposing more restrictions on its citizens. Both my colleague Mark Nestmann and I have observed that from a civil liberties standpoint, if present trends continue, Cuba and the United States will pass one another…..but going in opposite directions!

One still-maddening aspect of Cuban law relates to nationality. Under current law, a Cuban citizen born in Cuba doesn’t have the right to give up Cuban citizenship. Cuban nationals who acquire another passport can travel internationally on that document. However, anyone born in Cuba must use a Cuban passport to enter and exit the country. Recently, a Cuban-born friend of Mark discovered this the hard way when he was denied entry to the country using a U.S. passport. He was required to use his Cuban passport, which he no longer possesses.

Cuba retains this policy to enforce its arcane, outdated, and Byzantine migratory requirements, rules and regulations. Former Cuban President Fidel Castro has always taken a dim view of those who wish to emigrate. However, unlike the United States, Cuba does not tax its non-resident citizens on their worldwide income.

The United States, on the other hand, still permits its citizens to give up their U.S. nationality. However, it now faces the reality that the number of former U.S. citizens doing so has increased exponentially in recent years. Long waiting lists for expatriation appointments now exist at certain U.S. consulates (e.g., Berne, Switzerland). It’s also clear that the U.S. government despises this trend. U.S. law and policy actively discourage expatriation and have gradually made life more difficult for those who take this step.

Could Congress amend the Immigration and Nationality Act to prevent people from giving up their U.S. nationality, thus subjecting them to lifetime taxation on their worldwide income and estate? Yes, it’s a radical proposal, but similar proposals have circulated for at least a decade. For instance, in 2001, the United Nations published a report that proposed using tax policies as a tool to redistribute wealth and income. One key suggestion was to create a global tax collection authority, the International Tax Organization (ITO). This agency would “take a lead role in restraining tax competition.”

One responsibility for the ITO, the report suggested, would be to enforce the “permanent right” of governments to tax individuals who emigrate from their homeland. You would have no right to migrate from a high-tax jurisdiction to a low-tax one. The ITO would follow you wherever you go to collect tax. While the ITO hasn’t yet come into being, numerous initiatives to enforce global taxation are now in force. Mark recently wrote about one involving the exchange of tax information among various high-tax countries here.

I don’t think it’s too strong a statement to suggest that if the still relatively small number of individuals ending their U.S. citizen status continues to skyrocket, the United States will impose much stronger measures to stem the exodus. And in doing so, it just might follow the Cuban example of forbidding expatriation. Acting under the guise of simply following a “United Nations initiative” would provide a convenient excuse for doing so.

If expatriation could be a solution for you, start making plans…now.

Copyright (c) 2012 by The Nestmann Group, Ltd.

Jim Sexton is my”go-to” guy when I have questions about the arcane world of U.S. international tax laws and regulations. He understands the rules relating to controlled foreign corporations (CFCs), passive foreign investment companies (PFICs), the foreign earned income exclusion (FEIE), tax treaties, expatriation, and much more. Jim also recently opened an office in Vienna for his international tax preparation and planning firm, The Esquire Group. The office is set up to provide full-service U.S. tax preparation services for non-resident U.S. citizens and businesses.

James C. Sexton, Jr., LLM

Jim will deliver his lecture at 6.30 p.m. June 5 in the clubrooms of the Austro-American Society, Stallburggasse 2, 1010 Vienna.

To reserve your place at Jim’s lecture, or to inquire about tax preparation and compliance services in Vienna, e-mail service@esqtax.com.

A former client recently discovered this for himself. After acquiring a second passport, he subsequently made an appointment at a U.S. consulate and filed the paperwork to give up his U.S. citizenship. After a considerable delay, the State Department informed him that it was rejecting his expatriation.

Does this mean that this gentleman can never expatriate? Not at all. Indeed, the circumstances surrounding this case make the State Department’s rejection of his application completely understandable.

A U.S. citizen loses nationality by voluntarily performing any of the following acts with the intention of relinquishing U.S. nationality:

1. Being naturalized in a foreign country
2. Taking an oath or similar declaration of allegiance to a foreign state
3. Entering, or serving in, the armed forces of a foreign state if (A) such armed forces are engaged in hostilities against the United States, or (B) serving as a commissioned or non-commissioned officer.
4. ( A) Working for a foreign government as a citizen of that government; or (B) if such work requires an oath of allegiance or similar declaration.
5.  Making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state.
6.  Making a formal renunciation of nationality in the United States in wartime.
7. Committing treason, attempting by force to overthrow, or bearing arms against, the United States.

The overwhelming majority of individuals who voluntarily expatriate do so under options #1 (“relinquishment”) or #5 (“renunciation”). For instance, obtaining a second passport from another country (#1) is a potentially expatriating act. If you choose to expatriate after doing so, that is your right under U.S. law.

But again, an expatriating act must be done voluntarily and with the intention of ending U.S. citizenship. In Afroyim vs. Rusk (1967), the court declared that the government may not involuntary strip an individual of citizenship. Subsequently, in Vance vs. Terrazas (1980), and in amendments to the Immigration and Nationality Act, the law was further clarified. For instance, simply acquiring a second citizenship and passport is not sufficient evidence of intent to lose U.S. citizenship. The State Department must also be convinced by a clear preponderance of evidence that is your intent. (This is one reason why I think the recent proposal from Sen. Joseph Lieberman (D-CT) and Congressman Charles Dent (R-PA) to strip U.S. citizenship from anyone found to be “engaging in, or purposefully or materially supporting, hostilities”is probably unconstitutional).

The “intent” requirement is what tripped up the former client, who elected not to engage my firm to assist with his expatriation. After acquiring his second passport, he continued to use his U.S. passport for international travel. Subsequently, he elected to give up U.S. citizenship under the relinquishment option. However, the fact that he continued to use his U.S. passport after acquiring his second passport cast doubt on his true intentions. To expatriate successfully, he will need to make a formal renunciation of U.S. nationality. This will remove any doubt as to his intention and I have no doubt that it will be successful.

In the past, I’ve generally advised clients who have used our expatriation services to relinquish, rather than renounce, if they have a choice. Courtesy of an obscure 1996 law, relinquishment rather than renunciation may make it easier to obtain a visa to re-enter the United States. I describe the reasons here.

However, the State Department now lumps any U.S. citizen who expatriates into a single category, which it calls “renunciants.” This makes the distinction between renunciation and relinquishment seem largely irrelevant. As the procedure for renunciation is simpler, and removes any question of intent, I no longer see any reason to avoid this option. If you’re denied permission to reenter the United States after expatriation, it probably won’t matter if you relinquished or renounced. I’ll be writing more about this in a future post.

Copyright (c) 2012 by Mark Nestmann

It’s not riots in central cities, a collapse of food supplies or other essential infrastructure, a terrorist attack, or even the growing U.S. police state.

All of these threats are real, but all of them can be dealt with successfully through intelligent planning. For instance, by keeping a substantial store of food on hand in your home and not residing in or near a big city, you can mitigate the first two threats. And by leaving the United States and setting up residence in a country that actually respects civil liberties, you can reduce your vulnerability to the long arm of Uncle Sam.

No, what concerns me the most is that just like people, governments often imitate each other. And when it comes to tax collection, governments around the world are looking very intently at the United States, still the world’s largest economy and by far its most influential country. They see a country that has successfully forced every low-tax jurisdiction in the world to end any real semblance of bank secrecy, at least with respect to tax. Every major low-tax jurisdiction has agreed to turn over banking information on U.S. citizens and permanent residents to the IRS so that the agency can impose taxes and penalties on unreported accounts or income.

If you were the head of state of a country short on cash to pay for the unfunded promises you made to get elected, wouldn’t you like to have the same power over your own population? Well, you just might have a new tool to help achieve that goal, thanks to the global spread of a U.S. law called the Foreign Account Tax Compliance Act (FATCA).

By way of background, FATCA, enacted in 2010, imposes a 30% withholding tax on many types of U.S-source income and gross sales proceeds to what the law calls “foreign financial institutions” (FFIs) and “non-financial foreign entities” (NFFEs). FATCA’s withholding provisions will be phased in beginning Jan. 1, 2014 and come fully into effect three years later. To avoid this tax, FFIs and NFFEs must function as unpaid IRS informants. FFIs and NFFEs are defined so broadly that FATCA potentially impacts every foreign financial institution or non-financial entity in the world that receives, directly or indirectly, most types of U.S. source income.

For the U.S. government, the incentives of FATCA are obvious. It wants to end what it perceives as offshore tax evasion that supposedly costs the U.S. Treasury more than $100 billion annually in lost revenues. Never mind that this figure is wildly inflated; the mainstream press repeats $100 billion ad nauseum, so it must be true…right?

But FATCA also presents a threat to the United States. The threat is that inbound investment will dry up due to over-aggressive enforcement by IRS and the Treasury of the 30% withholding requirement. That could dramatically reduce foreign purchases of U.S. Treasury debt and crush the U.S. dollar.

The solution to the threat? Simply persuade every other country to enact its own version of FATCA. After all, governments worldwide have ramped up the printing presses and need every possible dollar, peso, or, euro to help pay the bills. That way, the vast majority of investors have no place to invest without paying tax to at least one government.

A global FATCA could provide an international framework obliging any company anywhere in the world that performs any type of financial service for anyone to serve as a tax collector for every government signing on to the agreement. Indeed, when FATCA came into law in 2010, the U.S. Treasury expected exactly this outcome. Of course, it could also mean sharing your most intimate personal and financial details not only with the U.S. government, but also with every other government signing on to the deal. And of course, if this data is not kept completely secure, it will also be used for criminal purposes, including kidnapping, identity theft, etc.

Will it happen? It already is, although perhaps in a slightly different manner than the Treasury envisioned.

On February 8, 2012, the United States signed a joint declaration with five EU nations (France, Germany, Italy, Spain, and the United Kingdom) to initiate an “intergovernmental approach to FATCA implementation.” The United States agreed to “collect and exchange on an automatic basis information on accounts held in U.S financial institutions” by residents of these countries. Tax treaties or tax information exchange agreements will be used so that financial institutions can turn over information to their own governments rather than to the IRS directly.

Historically, the major obstacle for this arrangement was the inconvenient fact that the United States doesn’t automatically collect or exchange information on non-resident accounts with any other country, with the exception of Canada. However, the U.S. Treasury is starting to remove this obstacle. On April 17, the Treasury issued final regulations that require U.S. financial institutions to report annually bank deposit interest income of all non-resident individuals to the IRS.

According to the preamble for the final regulations, they are necessary to combat offshore tax evasion for at least three reasons:

1. To obtain information on U.S. taxpayers from other governments through information exchange agreements, the U.S. government must have information to exchange;
2. The information will facilitate intergovernmental cooperation on FATCA implementation; and
3. The regulations will enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. accounts to claim falsely to be resident in another country.

If you live in a country that taxes your worldwide income, count on something like FATCA coming your way. Soon.

And if you don’t want to join in the fun? Then set up residence in a country that doesn’t tax worldwide income and that also doesn’t face an imminent financial crisis that might force it to change this policy. Countries that come to mind include Hong Kong, Panama, and Singapore.

If you’re a U.S. citizen, simply leaving the United States for a lower-tax residence isn’t enough. That’s because the United States imposes tax not just on the basis of U.S. residence, but also U.S. citizenship. To end U.S. taxation of your worldwide income, you must also give up U.S. citizenship and passport.

The Nestmann Group, Ltd. has helped dozens of U.S. clients through this process of “expatriation.” Contact us today for more information.

Copyright © 2012 by Mark Nestmann

If you’re considering expatriation, you need to read this report. The 2012 edition has some important updates from the 2011 edition, and if you purchased the report in the last year, you’re entitled to a free update. Just log on to your account at www.nestmann.com and retrieve the update.

If you haven’t read The Billionaire’s Loophole…well, what are you waiting for? This report gives you the information you need to know to determine if you’ll need to pay an “exit tax” on expatriation, how your pension and social security tax will be taxed after expatriation, along with suggestions on mitigating the potentially devastating tax consequences of expatriation.

Right now, only your unrealized gains are subject to the exit tax, and only if you’re wealthy enough to trigger the tax. That may change in coming years to an exit tax on everything you own, similar to the departure tax Nazis imposed on wealthy Jews who wished to exit Germany in the 1930s.

To learn more about The Billionaire’s Loophole just click here.

Numerous additional obligations come with U.S. citizenship or permanent resident status. For instance, you must make detailed disclosures of your non-U.S. investments annually to the IRS and U.S. Treasury. The Treasury may share the information it collects with almost any U.S. or foreign government or police agency.

You face additional tax pitfalls with reference to your non-U.S. investments and business activities. U.S. tax provisions for interests in non-U.S.-registered mutual funds, controlling interests in non-U.S. corporations, and interests in non-U.S. trusts are but three examples of the many “tax landmines” that U.S. taxpayers may inadvertently detonate.

A rapidly growing number of U.S. citizens and permanent residents have fought back the only way they legally can—by  giving up their green card, or their U.S. citizenship and passport. In 2011, IRS records show that at least 1,788 people went through this process of “expatriation.” That’s almost eight times more than the number of people who expatriated in 2008, and more than the total for 2007, 2008 and 2009 combined.

However, a much larger number of non-resident U.S. citizens and green card holders aren’t even aware of their ongoing obligation to comply with U.S. tax and reporting requirements. An estimated seven million U.S. citizens live outside the United States, yet only a few hundred thousand of them file U.S. tax returns. One reason for this widespread ignorance is that it’s relatively easy to be born a U.S. citizen. For instance, you’re a U.S. citizen if you were born within the geographic boundaries of the United States, even if your parents were not U.S. citizens at the time. In most cases, you’re also a U.S. citizen if you were born outside the United States, and at least one parent was a U.S. citizen or green card holder.

Starting around 2008, the IRS began to enforce these rules much more vigorously, especially with respect to non-resident U.S. citizens. For instance, in Panama, armed IRS agents now roam the countryside looking for non-compliant U.S. taxpayers living or doing business there. In Austria, I recently learned of the IRS calling a U.S. citizen’s unregistered phone number to remind her of her tax and reporting obligations.

Want to Become Compliant? Get Ready to Write a Big Check

Here’s how it worked in one case related to me. A Mexican citizen, now well past retirement age, grew up in a tiny town in Mexico near the U.S. border. At the time of his birth, the town lacked any medical facilities, so when his mother went into labor, his parents drove to the nearest hospital, which happened to be just inside the U.S. border.

Fast forward 70 or so years, and this gentleman was longing for some relief from hot Mexican summers. So, he did what countless other wealthy Mexicans have done—he purchased a condo in San Diego. At closing, he encountered a strange anomaly. The closing documents listed him as a U.S. citizen. He tried to correct what he believed to be a mistake, but the broker assured him the documents were correct. Since he was born in the United States, he was indeed a U.S. citizen.

Our hero thought that was the end of it, but when he arrived in San Diego for the summer, he received a notice from the Internal Revenue Service. The notice informed him that he was obligated to file U.S. tax returns. And there was no record of him filing a U.S. tax return for the preceding three years. The notice invited him to respond immediately.

A few days later, he drove over to the local IRS office to see if he could resolve the situation. After a brief conversation, he was shocked to learn that the IRS had already commenced an examination. The agent started using terms such as “willful failure to file,” “criminal penalties,” and “jeopardy assessment.”

At this point, our hero hired a criminal tax defense attorney. He spent about $100,000 in legal fees, and eventually received a notice from the IRS informing him that he wouldn’t face criminal penalties. Still, he had to pay 25% of the peak value of his unreported non-U.S. accounts for the period 2003-2010. Unfortunately for him, the value of these accounts fell about 35% in the global economic turmoil of 2008-2009. The accounts that were once worth $2 million are now worth about $1.3 million. Nonetheless, he paid a $500,000 penalty to avoid criminal prosecution.

In addition, he had to file six years of past due tax returns and information returns disclosing his interests in Mexican corporations and other Mexican entities. These returns had to be prepared according to U.S. Generally Accepted Accounting Procedures (GAAP), which means that the Mexican financial statements for each year had to be converted to U.S. GAAP. That expense cost him an additional $50,000.

To tally things up: our hero’s total cost of accidental U.S. citizenship: $650,000. Total benefit of U.S. citizenship: none.

Needless to say, this Mexican gentleman filed a formal petition with the State Department to surrender his U.S. citizenship and expatriate. That eliminates any future U.S. tax or reporting obligations on non-U.S. income or property, but doesn’t affect his past obligations.

Americans Now Locked Out of Non-U.S. Investments

At the same time, it has become much more difficult for anyone with even the most remote connection to the United States to invest or do business offshore. Recently, I met with a U.S. citizen who is also a citizen of another country. He and his wife plan to move back to that country to retire.

On his last visit to that country, he tried to open a bank account. To his surprise—and horror—the first document the banker gave him was a 10-question survey asking him to disclose all connections to the United States. Even a single “yes” answer could disqualify the applicant from opening an account. Indeed, citizens of this country who have never traveled to the United States must now complete this form when opening an account at this bank. Dozens of other clients have reported similar difficulties.

For all these reasons, I think the 1,788 expatriations the IRS reported in 2011 is only the beginning of a much larger trend. Indeed, I’m surprised the number isn’t 10 times or even 100 times larger.

The Many Benefits of Expatriation

Expatriation is a major decision. It requires that you have a satisfactory passport and citizenship from another country. It also means that you no longer have the automatic right to live and work in the United States. Even for brief visits, you’ll need to obtain a visa, unless your non-U.S. passport qualifies you for visa-free entry.

The payoff, however, is immense. Once you expatriate, you no longer have any obligation to pay tax on your non-U.S. income, nor file any reporting forms to the IRS or U.S. Treasury with respect to your non-U.S. investments. You also eliminate all the offshore investment restrictions now imposed on U.S. citizens or green card holders. Plus, you’ll no longer be expected to adhere to the numerous embargoes the United States has declared against its self-declared enemies (e.g., Cuba).

Our firm has helped dozens of U.S. citizens and green card holders permanently and legally eliminate future U.S. tax and reporting obligations through the process of expatriation. We can even help you obtain a second passport, if you don’t have one already. Contact us today for a consultation.

Copyright © 2012 by Mark Nestmann