Tax Connections recently reposted a post that I wrote:
“How To Live Outside The United States In An FBAR And FATCA World”. That post was reposted at the Isaac Brock Society, where it has received a number of interesting comments. Additional comments appear at the American Expatriates Facebook group. The comments have made me realize that there are many, many, more dimensions to this problem.
Americans abroad by definition live in other nations and are subject to the tax jurisdiction of other nations. My first post dealt with the life of U.S. citizens abroad from the perspective of U.S. taxation and regulation. What about from the perspective of your country of residence!
A particularly insightful comment at the Isaac Brock Society from Edelweiss reminded me that Americans abroad must be mindful of the tax laws of their country of residence. Edelwiess’s comment which is worth a post (and is being reposted here) is a stark reminder how the laws of all nations can impact your choice of investments anywhere.
In my original post, I listed as my “5th Commandment” (of 10 Commandments):
5. Thou shalt NOT buy non-U.S. mutual funds. If you do, you will have your gains confiscated in the form of an “Excess Distribution” Tax. Buy American. Buy U.S. mutual funds.
This is true from a U.S. tax perspective. Edelweiss reminds us that we must also consider the tax perspective from the country of residence – in this case the U.K. Edelweiss comments:
I have an issue with commandment 5. I totally agree with thou shalt not buy a foreign mutual fund. However, I think the conclusion that one should buy US mutual funds is very location dependent. Maybe Canada has better tax treatment of US mutual funds but the UK, for instance, does not. Depending on where you live, the conclusion might be as severe as “thou shalt not participate in any collective investment vehicle”.
In the same way that the US has punitive treatment for foreign mutual funds, the UK has punitive treatment for HMRC non-reporting funds. In the UK, gains on the sale of an HMRC non-reporting fund are treated as income and not subject to the capital gains regime. This can have dire tax consequences for UK resident taxpayers. For example, a £10,000 capital gain in an HMRC reporting fund wouldn’t be taxed at all in the UK since it would fall within the annual £10,000ish exclusion on capital gains. An HMRC non-reporting fund, would have the capital gain treated as income and subject to taxation at up to 45% (ie up to £4,500). (http://www.buzzacott.co.uk/news/fund-reporting-status-is-your-fund-attractive-to).
Just for the fun of it, I thought I would check to see how many HMRC reporting funds there are and how many of them are US funds. There are (according to https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds) about 42,000 HMRC reporting funds. The list of reporting funds doesn’t seem to include UK registered onshore funds who are already under the HMRC reporting regime. Of the 42,000, about 7,000 don’t have an ISIN code (International Securities Identification Number). These look mostly like hedge funds which are generally not available to retail investors. That leaves about 35,000 HMRC reporting funds. If you sort by ISIN code I count about 75 funds that have an ISIN code which begins with US (as opposed to GB or CH or IE or LU). I’m going to assume (this is not an area of expertise for me) that means that there are 75 US registered funds that are also HMRC reporting funds. So, out of the hundreds of thousands of funds available to invest in (including UK onshore funds), it looks like about 75 would attract neither UK non-reporting fund treatment nor US PFIC. So, if you’re a UK resident US citizen you’re screwed if you buy a UK mutual fund (PFIC) and screwed if you buy a US mutual fund (HMRC non-reporting fund status). Your returns are decimated by the one or the other country’s punitive regime.
What I can’t rule out is that some of the HMRC reporting funds have an LU or IE ISIN code but are somehow registered in the US. For instance, one of the largest ETFs in the UK is iShares FTSE 100. The info page (https://www.ishares.com/uk/individual/en/products/251795/ishares-ftse-100-ucits-etf-inc-fund) lists one ISIN for Ireland but says its registered in 16 countries. However, none of those 16 countries is outside of Europe.
I also can’t rule out that more US registered funds would somehow be considered UK compliant despite not being on the list of UK reporting funds. The UK reporting status seems to be most at risk for adverse treatment if it’s an accumulation class fund (where dividends are accrued but not distributed as opposed to income class shares which pays all income to the individual shareholder). I’m pretty sure that the US doesn’t have accumulation class mutual funds so maybe there is a broader variety of funds to choose from.
Polly reinforces Edelweiss’s comment as follows:
I agree- I think all mutual funds are off limits for expats.
Reading this just makes me sick to my stomach. In fact- I can hardly stomach it anymore. The injustice just screams to the heavens, but nobody in charge is listening. Its like blasphemy, what is being done to expats. The unfairness and exploitation should be named a CRIME, and not what I always hear: “but its the law!”
The following day (September 16) Publius, http://isaacbrocksociety.ca/2015/09/14/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/comment-page-2/#comment-6554912 OAP http://isaacbrocksociety.ca/2015/09/14/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/comment-page-2/#comment-6555731 and Edelweiss http://isaacbrocksociety.ca/2015/09/14/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/comment-page-2/#comment-6556362 added the following comments on the post at the Isaac Brock Society:
This is very important reminder:
Anything you do for U.S. tax purposes will have an impact on your tax situation in your country of residence! Don’t forget that basic fact.
Your choice of tax preparer and his or her country of residence …
The fact that U.S. persons abroad are subject to the tax jurisdiction of BOTH the United States and the country of residence implies that one needs a tax adviser who is “literate” in the tax systems of both countries. In practical terms this means that you should use a tax adviser in your country of residence. How many U.S. tax advisers in the United States are literate in both:
– the U.S. tax system and the __________________ tax system.
I suspect very few.
Obvious conclusion ….
Living as a “tax compliant” U.S. citizen abroad is somewhere between difficult and impossible. There are many non-compliant Americans abroad who are coming into U.S. tax compliance for the sole purpose of renouncing U.S. citizenship and NOT being a “covered expatriate and therefore subject to the U.S. Exit Tax rules.