ZKB's Stance on Americans Abroad: Another Wake-Up Call for US Tax Reform
Paying to Be American: The Unjust Costs of Citizenship-Based Taxation
The cost of being an American abroad? In Zürich, it starts at 90 Swiss francs ($113.75) a quarter. That’s what one local bank is charging American clients for basic banking services because of the additional cost of complying with U.S. financial disclosure laws.
As reported by Inside Paradeplatz, a recent decision by Zürcher Kantonalbank (ZKB), a Zürich regional bank, serves as yet another stark reminder of the unique and burdensome financial discrimination faced by millions of Americans living overseas. While the specifics of ZKB's internal policies are their prerogative, the underlying issue is the U.S. system of requiring its citizens worldwide to file American income tax declarations and disclose their financial accounts regardless of where they live. Known as citizenship-based taxation (CBT), this system employed only by the United States and Eritrea, an African dictatorship, continues to create unnecessary hurdles and discrimination for American citizens abroad.
The United States stands alone among developed nations in taxing its citizens on their worldwide income on top of any taxes they pay in the country where they live. This contrasts sharply with the residency-based taxation systems in place in nearly every other country, where individuals pay taxes where they live.
This singular approach creates significant challenges for Americans abroad, including:
Double Taxation: While mechanisms like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits (FTC) exist to mitigate double taxation, they don't always eliminate it, particularly for complex financial situations or certain types of income. Many Americans abroad end up paying substantial fees to tax professionals to navigate these complexities, often to find they owe little to no U.S. tax, but the compliance costs remain.
Exorbitant Compliance Costs: The U.S. tax code is notoriously complex. For Americans abroad–and the banks that accept them as clients–this complexity is compounded by the need to understand and comply with both U.S. and foreign tax laws. This often necessitates hiring specialized tax advisors, with costs for even "simple" streamlined procedures ranging from thousands of dollars, as highlighted in personal testimonials from Americans abroad.
Financial Discrimination (FATCA): The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, was intended to combat offshore tax evasion. However, it has had an unintended side effect: many foreign financial institutions (FFIs), including ZKB, find the compliance burden and risk of penalties associated with U.S. clients too high. As a result, Americans living abroad often face outright discrimination, are denied basic banking services, investment products (like certain ETFs), or have even had existing accounts closed. This is not only anecdotal; Swiss banks, including ZKB, have faced significant fines from the U.S. Department of Justice (ZKB paid $98.5 million in 2018 to settle a tax evasion probe related to U.S. clients), making them highly cautious about American clients. But Americans all over the world face the same discrimination even if they live in a high-tax country.
Difficulty in Normal Life and Business: As personal stories from Americans abroad attest, CBT can effectively act as an occupational ban. Simple everyday activities, such as managing finances or even small-scale peer-to-peer reimbursements, can become fraught with potential U.S. tax implications, leading to an inability to lead a "normal life" or run a small business without prohibitive tax and compliance burdens.
The fact that banks like ZKB need to navigate these uniquely American complexities–and that American citizens pay the price–underscores the urgent need for a fundamental change in U.S. tax law. We believe it's time for the United States to align with the rest of the world and adopt a residence-based taxation system.
A Call for Residence-Based Taxation
Tax Fairness for Americans Abroad strongly supports the Residence-Based Taxation for Americans Abroad Act that Rep. Darin LaHood (Rep., Ill.) introduced in Congress at the end of last year. This bill would allow Americans living overseas to opt out of U.S. taxation on their foreign-sourced income and related financial compliance obligations. That would allow them to lead normal lives without the constant specter of U.S. tax-related costs and complications that neither their neighbors abroad nor their compatriots in the United States face.
We urge Congress and the White House to prioritize this critical issue. Millions of law-abiding American citizens living abroad are not criminals; they are individuals contributing to the global economy and representing American values around the world. They deserve a fair and equitable tax system that doesn't penalize them for living outside U.S. borders.
If you are an American living abroad and affected by these unfair tax laws, we encourage you to share your story on our "Help Us" page and donate to our campaign. Your support is vital to our efforts to achieve tax fairness for all Americans abroad!
If you are an American living abroad and also suffer from double taxation, please help us in the fight for residence-based taxation! Share your own story on our Help us page and Donate using the button below! Our campaign is 100% financed by individual donations and every donation brings us one step closer to winning!