It’s one thing if a New Yorker creates a shell entity in the Cayman Islands to evade taxes. It’s another if an American who has spent most of his life overseas, as I have, creates a legitimate company. The I.R.S. doesn’t care about the distinction. Under a 1962 law, it treats the two companies I’ve started as “controlled foreign corporations,” subject to detailed regulatory requirements, though a majority of our employees and clients are foreigners.
Moreover, if you are an American, you can’t invest in foreign mutual funds without paying punitive tax rates. This is a blatantly protectionist measure for American funds, but it also makes saving for retirement very difficult.
Renunciations of citizenship have soared because of a 2010 law, the Foreign Tax Account Compliance Act, which requires foreign financial institutions to report assets held by American clients or face a 30 percent withholding tax. In response, many foreign banks will no longer take American clients and are terminating existing accounts. The Economist says this “heavy-handed, inequitable and hypocritical” law will cost American banks alone $800 million a year to implement. Moreover, the magazine reported, “seasoned tax dodgers are not so naïve as to hold money in their own names.”
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