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  • John Richardson

Claiming U.S. Citizen Abroad Foreign Tax Credit Against The 3.8% Obamacare Surtax


John wrote an article on August 7, 2016 which discussed the August 5, 2016 decision of the United States Court of Appeals – District of Columbia Circuits in the Esher case. In this case, Justice Millet ruled that:

That extreme reading of the Totalization Agreement rests on nothing more than the Commissioner’s own say-so. It lacks any grounding in the Agreement’s text or in any principle governing the interpretation of international agreements. The tax court’s corresponding disregard of the Totalization Agreement’s textual direction concerning the role of French law in resolving undefined terms and in determining the content of the laws enumerated in Article 2(1)(b) was error and requires reversal.

The general point is this:

When interpreting international tax treaties the United States is not permitted to consider ONLY U.S. law when interpreting the treaty. The United States (and the treaty partner country) is required to consider each country’s expectations of what the treaty meant and how it might be interpreted with respect to laws that did not exist at the time the treaty was signed.

John concluded that post with his thought that:

The court ruled that international tax treaties must be interpreted in the context of what were the expectations of the country when the treaty was signed. This may open up the possibility of reconsidering how various U.S. tax laws may affect the residents and citizens of other nations.

For example: To what extent was or is it the expectation of a country that it can be interpreted to allow the U.S. to impose punitive taxation on those who are primarily citizens of and factually residents of other nations? Time will tell.

The 3.8% Obamacare surtax (assuming it’s applicability to Americans abroad) is considered to be:

  • a form of pure double taxation when applied to Americans abroad

  • more likely to be paid by Americans abroad than by Homeland Americans

  • a way to force Americans abroad to pay for the medical care of Homeland Americans

  • a costly compliance nightmare

  • an example of “Boldly Go, where no regime of citizenship taxation has ever gone before”

Does Article 22 the U.S. Australia Tax Treaty require the United States to allow U.S. citizens a foreign tax credit against the 3.8% Obamacare Surtax?

  • Part I: A purely “U.S. centric perspective” – The Obamacare Surtax under the U.S. Internal Revenue Code

  • The Internal Revenue Code – A “Bird’s Eye View”

It is significant that the Obamacare Surtax is Internal Revenue Code Section 1411 which is Chapter 2A and Chapter 2A is part of Subtitle A which deals with INCOME TAXES! The Obamacare surtax falls under the “Income Tax” regime of the Internal Revenue Code.

  • John has written about the Obamacare surtax and double taxation before. The key points are:

A. The Net Investment Income Tax is in Section 1411 of the Internal Revenue Code

B. Section 1411 is NOT found in Chapter 1 of Subtitle A of Title 26 of the Internal Revenue Code. This means that it is NOT (under U.S. law) considered to be a “Normal” Tax (whatever that means). It is found in Chapter 2A which appears to be part of the Social Security Tax section of Subtitle A.

C. Because Section 1411 is NOT found in Chapter 1, the Foreign Tax Credit Provisions in Internal Revenue Code Section 901 (which is also part of Chapter 1) do NOT apply

D. This leads to the result UNDER THE INTERNAL REVENUE CODE that Americans abroad cannot use taxes paid in other nations as a foreign tax credit, under Section 901, in calculating their U.S. tax liability for the Obamacare surtax.

To put it another way, this result UNDER U.S. Law leads to PURE DOUBLE TAXATION.

Note that this is the result when ONLY the Internal Revenue Code AKA U.S. DOMESTIC LAW is considered!

Part II: An International Perspective – How is or should the Obamacare surtax issue be dealt with under U.S. Tax Treaties?

First, Totalization Agreements: Should Americans abroad be required to pay the Obamacare surtax AT ALL? Does the existence of a “totalization agreement” mean that Americans abroad are EXEMPT from the tax?

Totalization agreements are treaties that the United States has with other nations. A totalization agreements is a very specific kind of treaty that is designed to ensure that:

  • people are NOT required to pay Social Security (“type”) taxes twice; and

  • those whose work careers span more than one country can use their social security contributions in one country toward meeting the requirements for social security in another country.

  • A primer on “Totalization Agreements” is here.

But wait. If the Obamacare Surtax is really a “Social Security Tax” and totalization agreements exist to prevent the payment of “double security taxes”, then shouldn’t Americans abroad who live in a country with a “totalization agreement”, be exempt from the Obamacare surtax?

This issue has been thoughtfully explored by others who suggest that the answer is YES. Americans abroad living in countries with a Totalization Agreement may be exempt from paying the 3.8% Obamacare surtax.

Second, general tax treaties: If Americans abroad are required to pay the Obamacare surtax, can the provisions of a tax treaty (in this cause Australia) be used to argue that the foreign tax credit DENIED under the Internal Revenue Code should be allowed under the treaty? This does NOT mean that Americans abroad are exempt from the Obamacare surtax. It would mean that taxes paid in Australia on the investment income, can be used as a credit against any Obamacare surtaxes levied against Americans abroad.

John suggests the answer (at least in the case of the U.S. Australia tax treaty) is YES!

First: International tax treaties are to be interpreted NOT ONLY by U.S. law, but by the expectations of BOTH Treaty Partner Countries. This is the significance of the Esher case.

Significance: This means that in considering whether a tax should be a “creditable tax” under a treaty, the expectations of both countries must be considered. One might ask: Would Australia expect that the Obamacare surtax could be used to impose a separate 3.8% tax on Australian citizens and residents (particularly when the investment income was from Australian sources)?

Second: The “savings clause” (found in ARTICLE I (3)) does not apply to ARTICLE 22 (Relief from Double Taxation).

Significance: This is an exception to the “savings clause”. We interpret the treaty as though the Savings Clause did NOT exist. U.S citizens living in Australia DO have the ARTICLE 22 protection against double taxation.

Third: ARTICLE 2 states that in the case of the United States, the treaty applies to: (1) “the Federal income taxes imposed by the Internal Revenue Code, but excluding the accumulated earnings tax and the personal holding company tax;”, and (2) “any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of this Convention in addition to, or in place of, the existing taxes.”

Significance: Chapter 2A (Section 1411) is found in Subtitle A which is the Income Tax section of the Internal Revenue Code. The fact that a tax credit is not allowed under U.S. domestic law is irrelevant. In addition, the Obamacare surtax is a tax on investment income which is the kind of tax that both countries would expect to be contemplated by ARTICLE 2. Investment income is income. The Obamacare surtax is an additional tax on investment INCOME. In other words, it seems reasonable to conclude that the Obamacare surtax, by definition and expectation, is the kind of tax that is within the scope of the treaty.

Fourth: “ARTICLE 22 Relief From Double Taxation” states:

(1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), in the case of the United States, double taxation shall be avoided as follows:

(a) the United States shall allow

to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; …

Such appropriate amount shall be based upon the amount of income tax paid to Australia. For purposes of applying the United States credit in relation to income tax paid to Australia the taxes referred to in sub-paragraph (1) (b) and paragraph (2) of Article 2 (Taxes Covered) shall be considered to be income taxes. No provision of this Convention relating to source of income shall apply in determining credits against the United States tax for foreign taxes other than those referred to in sub-paragraph (1)(b) and paragraph (2) of Article 2 (Taxes Covered).

Significance: The issue is whether the Obamacare Surtax is an “Income Tax” within the meaning of the U.S. Australia Tax Treaty. The issue is NOT whether the Obamacare Surtax is an “Income Tax” under narrow definitions of U.S. law. In any case, when U.S. law is considered, it is notable that Internal Revenue Code S. 1411 is under the “Income Tax” section of the Internal Revenue Code. In addition, it strikes John that the Obamacare surtax falls squarely within the type of tax on income that would be reasonably expected to be contemplated by Article 22 of the treaty.

Conclusion: John believes that an argument can be reasonably made that Americans abroad in Australia who are subject to the 3.8% Obamacare surtax are entitled to a tax credit for taxes paid on that investment income to Australia.

Obviously this is NOT legal advice. It is John's attempt to explain a treaty position that may or may not be successful.


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