Thoughts on Exit Taxes in the Modern World by @VictoriaFerauge – Do the S. 877A rules go too far?

The above tweet references a comment that appeared on post written by Victoria Ferauge on her “” blog. It is a old post that was written about “Exit Taxes” in general which she refers to as:

An exit tax is a tax that is levied against an individual or a corporation who wishes to transfer residency or citizenship from one country to another.  It is a tax on emigration and/or expatriation.  How does it work and what is its purpose?:

In general, ET [Exit Taxation] aims at levying the potential or latent gains (also called “hidden reserves”) related with the assets that an individual, a company or a PE located in a given country, economically (eg., through allocation to a foreign PE of a trademark or a shareholding), or physically transfer to another tax jurisdiction. A first feature of ET is, thus, related with the fact that it is imposed when no asset disposal takes place, and no revenue is generated.

It is a tax that the United States levies against certain individuals who relinquish U.S. citizenship. I recommend this Victoria’s post as an objective description of what is meant by an Exit Tax. I also found that I had left the following comment on the post:


Great post. Makes one think. Here are some thoughts on this topic – noting that this post is restricted to the topic of the Exit Tax.

I think that an Exit Tax per se is probably consistent with international law, including the relevant human rights instruments. That said, it can go too far, and in its specific application, violate certain human rights agreements and international law.

I suspect that if an Exit Tax is aimed at and rationally related to taxing economic activity in the country doing the taxing, than it is probably (in most cases) okay. The problem is when it does not do this. I believe that the application of the U.S. Exit Tax is contrary to international law in at least two specific cases.

1. Where the U.S. taxes the increase in the value of an asset, that accrued prior to the the person having any connection to the U.S. Example: in 1990 person A buys a property for $1000. In 2000 that person immigrates to the U.S. and the property has a fair market value of $5000 at that time. In 2020 the person leaves the U.S. As I understand the law, the payment of the Exit Tax would include payment on the $4000 gain that accrued prior to the person immigrating to the U.S. This seems to me to be very unjust. That $4000 gain accrued prior to the person having any connection with the U.S. and the property is not in the U.S.

2. Imposing the Exit Tax on a U.S. citizen who moved from the U.S. prior to owning any assets or having any income. Say the person moves to Switzerland at the age of 15. The person never returns to the U.S., never makes any income in the U.S. and holds no U.S. assets. At the age of 55 the person can no longer stand the forms and renounces. The Exit Tax would apply to all the person’s assets – even though not a single one of them as any U.S. connection. Now, the U.S. would argue that the issue is not the location of the asset or where the income was earned to purchase the asset. The U.S. would say: tough luck you are a U.S. citizen. Okay, fine. But, that is an understanding of citizenship that means that the state has a “property right” in the citizen and therefore in the citizen’s assets. Now, it seems to me that this is exactly what various human rights instruments are trying to combat. The purpose of human rights instruments is to clarify that citizenship is a voluntary association. Note that this example is dependent on accepting the principle of citizenship-based taxation – which might be in violation of international law.

I don’t see the issue of Exit Taxes as an “all or nothing” question. I think that one needs to consider the specific application of the tax. I believe that the U.S. is in serious trouble (at last morally) on this issue.

I would be interested in your thoughts on my thoughts.


August 24, 2012 at 1:03 AM  


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