Which OECD rule(s) do citizenship-based taxations contradict?

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I read on 20minutes.fr (mirror) that some French politicians are trying to pass a law exempting dual US+French citizens living in France from US taxes:

« Le problème principal, c’est que la fiscalité américaine est basée sur la nationalité, en contradiction avec les règles de l’OCDE, estime l’eurodéputée française Virginie Rozière. L’Erythrée a voulu faire pareil et a été sanctionnée. Il n’y a pas de raisons de traiter les États-Unis différemment. Ils ne se comportent plus comme un grand frère bienveillant mais comme un acteur sans foi ni loi qui cherche le rapport de force. Si on n’est pas capable de répondre, on se fera écraser ».

Translation (based on Google Translate):

"The main problem is that the US tax is based on nationality, in contradiction with OECD rules," said French MEP Virginie Rozière. "Eritrea wanted to do the same and was sanctioned. There is no reason to treat the United States differently. They no longer behave like a benevolent big brother, but as a faithless, lawless actor who pursues relations based on force. If we cannot respond, we will be crushed."

Which OECD rule(s) do citizenship-based taxations contradict?

Franck Dernoncourt

Posted 2018-07-07T00:36:48.027

Reputation: 1 645

Just as a side thought: my French isn't good but I gather the article talks about the hassle "accidental Americans" (e.g. US citizens by birthright) have with their taxes. That is, the hassle they have now, as there are mutual reporting agreements so banks over here do FATCA reports and therefore the US tax authorities now know about those accidental Americans. As I understand it, the legal status wrt taxation/reporting income has not changed (i.e. those American citizens should always have filed an American income tax declaration). – cbeleites unhappy with SX – 2018-07-08T11:55:57.827

Over here in Germany, we learn in school that the US is a country with birthright citizenship, and so is France (somewhat more restricted than the US birthright). So a German side thought is that maybe France is one of the countries where I'd expect people to be aware of citizenship by birthright - and of its consequences. I'm not entirely sure, but my guess is that it someone who doesn't have anything to do with the US besides accidentally having been born there could renounce that citizenship and then wouldn't have that tax hassle. => all in all sounds a bit like silly season to me. – cbeleites unhappy with SX – 2018-07-08T12:05:38.823

Answers

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The Model Tax Convention

The Model Tax Convention is the basis for agreements among OECD members regarding international tax agreements. It basically helps them coordinate taxation policy.

One of the core purposes of the Convention is to keep a person from being taxed twice for the same thing:

International juridicial double taxation can be generally defined as the imposition of comparable txes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods. Its harmful effects on the exchange of goods and services and movements of capital, technology and persons are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries [Source]

Taxation based on nationality allows a person to be double-taxed. For example, a United States citizen working in Germany is theoretically subject to two income taxes. Article 21 of the Convention says that private income should be taxed where it was earned, regardless of the nationality of the worker. In our theoretical case that means it should be taxed by Germany and not the United States. However, since the United States taxes based on nationality (citizenship) this person could effectively pay two income taxes, unless the U.S. and Germany have ironed this out*.


/* I don't know if the United States and Germany have any kind of tax treaty that stipulates how this works. This is a purely theoretical situation used to illustrate the Convention's terms and is not otherwise based in reality.

indigochild

Posted 2018-07-07T00:36:48.027

Reputation: 22 718

2The Model Tax Convention is not a binding law, it is a potential model for the law so wouldn't fulfill the parameters of OP's question. – Eremi – 2018-07-07T02:33:23.977

3OP just says "rules". An international convention is certainly a rule. Limiting it only to binding law wouldn't make sense for an IR question – indigochild – 2018-07-07T04:58:49.423

1@Eremi There is no such thing as binding international law. There are treaties and conventions, but countries can choose to not sign them, withdraw from them or break them if they want to and are able and willing to take the resulting international pressure. – Philipp – 2018-07-07T10:45:47.793

BTW: such an agreement to avoid double taxation between Germany and the USA does actually exist. (As between many other countries) Rumor has it that one substantial difference is that US citizens living abroad have to file US income tax declarations whereas other countries do not require this in many cases (if it is clear that no taxes are due). – cbeleites unhappy with SX – 2018-07-07T17:01:53.593

Eh--the thing is the convention isn't even a treaty, it's a model for other treaties. – Eremi – 2018-07-07T18:19:46.037

@cbeleites For example, for Germans working in the USA it is clear that they don't owe German taxes because they are not working in Germany. – gnasher729 – 2018-07-07T23:13:27.627

@gnasher729: they don't owe German taxes on their US wages as long as it is clear they are not German residents. But they may still be subject to restricted taxation in Germany e.g. for German sources of income. But that's nothing special. The difficulty is that there are (at least) two points where several sensible alternatives exist. So different countries took different decisions, and cross country taxation becomes complicated: 1. tax by source vs. tax by total income and 2. how exactly to account for foreign taxation: saying the income has been taxed already => lower taxable income vs. ... – cbeleites unhappy with SX – 2018-07-08T11:16:28.650

... saying that x amount of taxes has already been paid => so the amount due for the full income (y) is lowered by x (this is e.g. what Germany does for residents with foreign income, so-called Progressionsvorbehalt/progressivity proviso). (And BTW, the rules for restricted/unrestricted tax liability do have some specialties beyond the more-than-half-of-the-year residence rule) – cbeleites unhappy with SX – 2018-07-08T11:19:15.943

Also, while citizenship based tax rules may be unexpected when many countries tax by residence, other differences and combinations of how different countries set up their tax laws would also lead to double taxation unless there's a double taxation agreement. – cbeleites unhappy with SX – 2018-07-08T12:08:06.807