RESIDENCE-BASED TAXATION (RBT). WHat IS it? what does it mean?

The United States taxes on the basis of citizenship. This means it taxes American citizens on their worldwide income regardless where they live. An American citizen living in London, or Toronto, or Tokyo, or Johannesburg, generally must file U.S. tax returns and pay U.S. tax, even if he or she does not live in or travel to the U.S. Taxation is not based on any physical presence test. The source of the income makes no difference either: income exclusively earned and additionally taxed abroad is also subject to U.S. reporting. Moreover, Americans abroad are commonly taxed twice, for example on some types of investment income and certain retirement-savings vehicles. In some cases, where an individual was born in the U.S. to foreign parents on a student or temporary work visa who then returned to their home country, are also subject to US taxation on their foreign-earned income.

The worldwide norm is to tax citizens based on their residence and where their income is earned. This is the concept of Residence-Based Taxation (RBT). ACA’s RBT approach calls for separating foreign-source and US-source income and excluding from US taxation specified foreign-source income earned when a US citizen is a qualified resident abroad. Under RBT an individual is taxable on US-source income only and not on foreign-source income due to the US citizen being officially resident outside of the United States. ACA has developed a road-map to how Congress can look at developing RBT but it is up to the tax-writing committees to write the legislation. To do this, the tax-writing committees need to hold hearings and need to see and analyze ACA’s and others' data and research. Updating that data and research is essential and needs to be done NOW and by building on ACA’s already existing work with District Economics Group (DEG).

The current US tax policy is incompatible with the global economy of the 21st century where the tax policy of most industrialized nations is based on residency and not nationality. CBT works against US economic interests in terms of job creation and increasing exports, is costly and counter-productive to the interests of US citizens who are living and working overseas, and it is plain unfair.


 

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