Tax bills prompt Chinese to ditch US passports
The long arm of the American taxman has many wealthy mainlanders ruing theday they decided to get US citizenship, and more are considering trying to get rid of it
For many wealthy mainland Chinese who immigrated to the US, an American passport is a genie that cannot be put back in the bottle.
More and more of them are thinking about renouncing their US citizenship, something that would have been almost unimaginable a decade ago, when getting a US passport was the ultimate status symbol in China.
Wu, a 31-year-old housewife who asked to be identified only by her family name, said she started toying with the idea about a year ago. "I regret it to death, all of my friends regret it to death," said Wu about taking out US citizenship. "I'm never going back."
Behind her change of heart is tax. Under US law, American citizens and permanent residents, known as green card holders, are taxed on their worldwide income regardless of where they live. Other countries, including China, tax their citizens' global income. But it is the US, with its sophisticated systems and the long arm of its taxman, that has the highest profile.
In March 2010, Washington stepped up its tax collection efforts by enacting the Foreign Account Tax Compliance, or Fatca, aimed at cracking down on tax dodgers abroad. The regulations are set to be finalised before year's end, and the US Internal Revenue Service (IRS) expects the tightened compliance to generate as much as an extra US$9 billion over the next decade.
America's long history of tax collection, starting with the 16th amendment to the constitution that gave Congress the power to levy and collect taxes, makes paying tax a serious legal issue that many immigrants do not realise when they decide to become citizens. The law even extends beyond life to a dead person's estate.
But it's not just having to pay up that's a problem. Americans and green card holders face onerous US reporting requirements, often have trouble opening bank accounts outside the US and frequently find it hard to form business ventures overseas because potential partners fear getting on the IRS' radar screen.
The number of Americans renouncing their citizenship rose to about 1,780 last year from just 280 in 2006, according to data from the US Federal Register compiled by the Sunday Morning Post. The figures don't distinguish between US-born and naturalised citizens, and don't include permanent residents who have given up their green cards.
"With all this compliance burden, we think that the trend of US citizens at least thinking about giving up their citizenship" will continue, said Anthony Tong, a tax services partner at PricewaterhouseCoopers in Hong Kong.
Many wealthy people are deterred from giving up their citizenship halfway through the process when they learn the IRS will inspect their income globally looking for evidence of tax evasion, said Timmas Deng, a Hong Kong lawyer who specialises in immigration. "It's very hard to find a Chinese entrepreneur with an impeccable tax reporting history," he added.
John Gaver, author of The Rich Don't Pay Tax!...Or Do They?, argues that vast and increasing numbers of wealthy US citizens are just "dropping out" - taking all their wealth and quitting the US without ever formally renouncing their citizenship.
But this bears risks. Take, for instance, Steven Ng-Sheong Cheung, a Hong Kong-born economist who became a naturalised US citizen. He fled to mainland China from Hong Kong after he was indicted by the IRS in 2003 for tax evasion. He is still holed up on the mainland, which doesn't have an extradition treaty with the US. But Cheung could be extradited to the US if he travels to jurisdictions that do have such treaties, and according to the US State Department, that is more than half the jurisdictions on the planet, including Hong Kong.
Renouncing US citizenship is also expensive. Deng, the Hong Kong lawyer, said it usually took one to two years to complete the process. To avoid an individual becoming stateless, the US requires anyone giving back citizenship to be a citizen elsewhere.
There is also the fee for legal advice, which runs up to US$30,000 at Deng's firm. And there's a so-called expatriation tax, a charge that has to be paid when the US passport is surrendered, and which is subject to a complicated calculation. Different rules apply depending on the date of surrender. For instance, people giving up their citizenship since June 16, 2008, can be taxed as if their worldwide assets were sold at fair value at the time, even though there are no actual sales.
The rules "require individuals to come up with extra liquidity in a short time, which could be hard to fulfil", said Angelica Kwan, a US tax expert and partner at accounting firm PricewaterhouseCoopers in Hong Kong.
People who gave up their US passports before June 16, 2008, and who are deemed to meet a certain threshold of income or net worth are generally subject to continued US tax on a certain amount of their income for 10 years following the date they are no longer considered to be US citizens.
Still, the number of mainland Chinese immigrating to the US continues to swell. Last year 34,693 did so, more than double the number in 1992, according to the latest available figures from the US government.
Many are seeking better health care, a better environment or asset protection. Political risk is also a key reason, said independent economist Andy Xie, a Chinese citizen who lives in Shanghai and does not hold a US passport.
"For private entrepreneurs who became rich in China," Xie said, the chances were "very slim" that they hadn't been engaged in some kind of official corruption. That begged the question, he added, of "is this your money or the government's money".
Unlike the US, China doesn't recognise dual nationality, and Chinese who acquire foreign nationality are supposed to automatically lose their Chinese nationality, says Patrick Phua, a Beijing-based partner at law firm Ashurst.
Many mainlanders, like Wu, retain their Chinese citizenship while holding US citizenship, betting they will not get caught.
When Wu first decided to try to become a US citizen, she said it was the "in" thing to do in China. Her mother was living there temporarily, so Wu went there to study. Once she graduated, she wanted to stay on, so she took out citizenship, becoming the only member of her family to do so. Later, she married a wealthy mainlander but he doesn't have a US passport. Wu, who now has an eight-month-old child, said she was not worried about losing her Chinese citizenship because having more than one passport is "quite common in China".
Today, Wu splits her time between Hong Kong and the mainland. She has no ties to the US, where she says she has never owned property or any other assets. All of her immediate relatives live on the mainland and she hasn't been to the US for nearly a decade.
Wu never travels anywhere on her US passport, and tries to hide all traces of her income. Once she even refused to sign a contract with a potential business partner lest it leave a paper trail for US tax authorities to follow.
"I had no idea about the legal risks when I applied for American citizenship," Wu said. "If only I had consulted a lawyer."
US citizens and resident aliens are taxed on their worldwide income.
Some taxpayers may qualify for the foreign earned income exclusion and foreign housing exclusion, or foreign housing deduction, if:
Their tax home is in a foreign country;
They are US citizens who are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year;
They are US resident aliens who are a citizen or national of a country with which the United States has an income tax treaty with a nondiscrimination article in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or
- They are US citizens and resident aliens who are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Taxpayers may be able to claim a foreign tax credit if required to pay a foreign income tax to the foreign country, if he or she has not elected the foreign earned income exclusion with respect to that income.
Taxpayers may also qualify to deduct away-from-home expenses (for travel, meals, and lodging), but not against excluded income.